HM Revenue and Customs has confirmed people can split pension transfers and still keep enhanced protection.
In the latest edition of its pension simplification newsletter, HMRC has also clarified the A-Day rules surrounding payments to members under the age of 55, and where the assignment of death benefits under a term assurance policy does not count as an unauthorised payment.
The extra guidance and examples, which will be incorporated into the Registered Pension Scheme Manual (RPSM), have been published almost four months after A-Day, and just a week after HMRC had to issue amendments to legislation to close a potential loophole.
Rachel Vahey, head of pensions development at Scottish Equitable, says the newsletter is just giving some much needed clarity on these issues, as the more you work with new legislation the more wrinkles which appear.
Under this latest bout of tidying up, HMRC has clarified the situation around when and how members can lose their enhanced protection when transferring benefits from one scheme to another.
The original legislation says enhanced protection can be kept if all the benefits are transferred into a different scheme, however it wasn’t clear if benefits could be split between two schemes.
However, HMRC has said transfers can be split and protection can be kept, which is particularly important for transfers where protected rights, which are the funds built up from contracting-out, are involved.
Andrew Tully, marketing technical manager at Standard Life, says the news makes it much easier for advisers to comment on transfers for those with enhanced protection in money-purchase schemes.
He says: “It will be especially useful for those with protected rights who wish to transfer into a Self Invested Personal Pension (Sipp). This change means most of the money could be transferred to the Sipp, with the protected rights going to a standard personal pension.”
Meanwhile, HMRC has also confirmed members who are currently taking benefits following a scheme retirement age of 50, as allowed under the pre-A-Day rules, will not be hit by a tax charge if they have not reached the new minimum scheme retirement age of 55 when it comes into effect in April 2010.
Originally, the A-Day legislation states any payments made after this date to someone below the age of 55 would be deemed as unauthorised payments and taxed at 55%, which means to avoid the charge, some people may have had to stop pension payments in 2010 until they reached the minimum age when they could re-start.
Tully says: “This confirmation is the only sensible course of action for HMRC. To be taxing payments which were legitimately brought into payment before 2010 would have been completely unreasonable. It’s pleasing the Revenue has listened to industry concerns on this issue.”
In addition, the Revenue also issued detailed examples outlining when the assignment of death benefits under a term assurance policy, falls under section 172 of the Finance Act 2004 to be treated as an unauthorised payment.
HMRC says the assignment of death benefits do not come under section 172, unless they are classed as “prospective entitlements” for a dependant of the member, this means the distribution of death benefits through a trust at the discretion of either the trustees or scheme administrator should not automatically result in a charge.
However, if the beneficiaries are named, and payments are not made on a discretionary basis, this would be considered a “prospective entitlement” and an unauthorised payment charge would apply.
Vahey points out this is quite a confusing issue as more and more people are beginning to put their death benefits under trust, and the industry has wanted to make sure these won’t be treated as unauthorised payments.
She adds: “This is giving us some much needed clarification over what is and isn’t an unauthorised payment. The Revenue has been working closely with the industry on this issue and we are keen to work together to find a sensible route on the treatment of death benefits.”
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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