Proposals to extend the transitional protection rules to prevent people losing either life cover or enhanced protection have been revealed by HM Revenue & Customs (HMRC).
The rules relate to members of schemes who have applied for enhanced protection because their fund is over the lifetime allowance limit, but also have a regular premium term assurance life policy as part of their pension.
Under the original rules, enhanced protection could be lost if the member continued to make contributions to the pension scheme in order to fund the premiums of the life policy, which means they would either have to lose life cover or the enhanced protection.
Similarly, individuals with enhanced protection may also belong to schemes which include stand-alone entitlements to death benefits, which may be paid out as a lump sum if the member dies before retiring or reaching a certain age.
Because the rights to these payments normally have no value, as there is no benefit unless you actually die, they are not included in the total covered by the enhanced protection from the lifetime allowance charge. This means the lump sum death benefits are potentially taxable if the member dies after A-Day.
Following representations and comments received from the pensions industry, the government proposes to include an extension to the current transitional protection rules in the Finance Bill 2006.
The new rules will allow insurance premiums to continue to be paid into policies which will pay lump sum death benefits, providing the benefits payable are the same as those offered under the terms of the policy as it stands on 5 April 2006.
HMRC also says the extensions to the rules will protect the amount of stand-alone lump sum death benefits which would have been payable if the member had died before A-Day, in the event the individual dies after A-Day within the terms of the policy.
John Lawson, head of pensions policy at Standard Life, says the extension is the first piece of good sense from the Revenue in about six months.
He adds: “This is good news as it looks like we’re okay on both possibilities of losing protection. We’ve been debating this since about June last year, and we’ve had two or three different interpretations and lots of to-ing and fro-ing with the Revenue. But it makes good sense as the Revenue didn’t want the hassle any more than anyone else did, plus it would be bad news for the Government to see widows facing huge tax bills.”
But Rachel Vahey, head of pensions development at Scottish Equitable, says although this is a positive development, particularly for the Revenue to revisit the issue and admit their first solution was incorrect, there is the need to see more of the finer details.
She adds: “This is very positive for the cases discussed, but there are still some elements missing. We need to see detailed legislation to make sure all life plans are included, and that it is all encompassing. As it stands this is not a perfect solution.”
Vahey also points out there are still some issues for advisers to deal with, as the extensions proposed by HMRC only affect life cover in force at A-Day, which leaves a very big danger people taking life cover out after 6 April, possibly by changing jobs where people are automatically enrolled into it, could mean they lose the protection.
She says: “There is also the danger by simply changing the terms of the policy such as increasing the amount insured individuals could again lose their enhanced protection. Advisers need to work with clients who have this protection to ensure this doesn’t happen.”
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