Members of money purchase schemes could escape having to pay a recovery charge on any funds above the lifetime limit by selecting enhancements which would normally lower the value of an annuity income, says Standard Life.
According to Standard Life's senior technical manager John Lawson, pension scheme members could avoid paying the 55% recovery charge on any funds above the proposed lifetime allowance by buying a "scheme pension".
Latest amendments to pending pension rules set out in the Finance Bill states that schemes are allowed to pay a "scheme pension" which is limited for the purposes of the lifetime limit to a pension equal to 1/20th of the allowance, Lawson says.
Effectively, this means a scheme member will be allowed a pension of about £75,000 a year based on the introductory £1.5m lifetime limit without paying any recovery charge.
For example, a 60-year old man with a pension pot of £2.2m could when buying a scheme pension receive an annuity with 100% reversion to his spouse on death and RPI indexation to provide a yearly pension of around £75,000. As this sum equals £1.5m divided by 20 (20 x £75,000 = £1.5m) there will no recovery charge incurred, Lawson explains.
However, if that same man opts for a lifetime annuity or decides to go into drawdown without adding the additional benefits - and does not carry transitional protection - he will be taxed on any surplus over the lifetime limit. In this case, the man would have had to pay a hefty tax bill of £385,000.
Lawson says: "This is a significant change from the December consultation document and puts money purchase schemes and defined benefit schemes on a level playing field in this respect."
There has been a lot of talks on how defined benefit schemes members will be better off than DC members under the coming legislation. However, Lawson adds, "that disadvantage seems to have been taken away now".IFAonline
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