Members can now protect their entitlement to more than 25% tax free cash, or an early retirement age, if they are assigned a policy after their original scheme winds-up.
Under the A-Day legislation there were only two circumstances in which members could protect their entitlement to these extra benefits if they transferred benefits, or their scheme wound up after A-Day.
They either have to transfer as part of a block transfer, which is two or more people, or they have to transfer into a section 32 deferred annuity contract, despite the industry pointing out another common way of dealing with benefits when a scheme winds-up is for a policy to be assigned to a member, as it avoids any transfer penalties or a market value reduction (MVR).
At the moment, however, there is no protection offered to members with entitlement to extra benefits, which means if they are assigned a policy they lose their tax free protection and are only allowed to receive a 25% lump sum.
But HM Revenue & Customs has now published draft secondary legislation which confirms it is proposing to extend the existing transitional protection to cover the benefits of members who are assigned policies on wind-up.
Andrew Tully, pensions technical manger at Standard Life, says this is a sensible and welcome change by the government. It was unfair and inequitable that where benefits were assigned to an individual, rights to higher tax free lump sums were not protected.
And he adds the change to the rules means “advisers and members can now decide the most appropriate place to hold benefits without worrying about losing of their valuable tax free lump sum.”
Rachel Vahey, head of pensions development at Aegon Scottish Equitable, also welcomes the proposals to remove an “anomaly” in the existing legislation which she says seemed to be just down to the way it was drafted.
She adds: “This is fantastic news, we are very pleased as before the legislation wasn’t transparent and wasn’t simple to understand about who was entitled to protection and who wasn’t. This is a demonstration of what happens when HMRC and industry work together constructively to iron out these anomalies.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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From 6 April 2019