Amendments to the pension simplification regulations published just before A-Day, reveal only 25% of protected rights in a pension can be taken as a pension commencement lump sum (PCLS), even if the scheme member is entitled to a higher amount.
Now a Statutory Instrument, the Taxation of Pension Schemes (Consequential Amendments of Occupational and Personal Pension Schemes Legislation), set out a series of amendments to the pension simplification legislation.
Among them was an amendment to the protected rights section of the Personal and Occupational Pension Schemes regulations of 1996 which states a PCLS can only be taken providing the scheme imposes a maximum limit on the amount to be taken.
This limit has to be a maximum of 25% of the protected rights fund, or the percentage amount which represents the value of the protected rights, equal to the percentage of PCLS sum the member is entitled to based on previous benefit crystallisation events, whichever is lower.
John Lawson, head of pensions policy at Standard Life, says for example how it would work is if a member had a pension fund of say £50,000 with £40,000 of it as protected rights, and if the member is entitled to 50% PCLS, or tax free cash, this would mean they could take £25,000.
However because of the limit on protected rights, the member would only be able to take 25% of the £40,000, which is £10,000 and the remaining £10,000 of its non-protected rights savings to give a total of just £20,000, £5,000 less than they are actually entitled to.
Lawson says while this is an extreme example, many advisers may not be aware of the limit and could have been planning to use the protected rights section of a pension to fund the whole of a members pension commencement lump sum.
He says: “Because there are specific limits to what you can do with protected rights benefits, such as having to buy a unisex annuity, this limit stops people from taking all thief PCLS from protected rights.”
Rachel Vahey, pensions development manager at Scottish Equitable, agrees adding people have to take a PCLS from protected rights on a pro rata basis, as it is a way of making sure people don’t find and exploit any loophole to avoid using the money in a specific way.
However there is another issue with protected rights when they form part of a pension credit transfer, which advisers may not be aware of. A pension credit is when a pension fund is split following a divorce, and protected rights within a credit become safeguarded rights.
She says: “With safeguarded rights, you are not able to take anything from them at all, not even tax free cash. Again its not something that will occur everyday, but it is yet another of these small sneaky amendments which advisers need to be aware of.”
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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