A-day rules allowing ‘protected rights' to be taken before the age of 50, provided there is a ‘protected pension age' in place, is causing confusion which could lead to a 70% tax charge.
Scottish Life says it has received a number of enquiries as to whether protected rights can be taken earlier than the minimum retirement age of 50, or 55 from 2010, as under the original rules protected rights could not be taken before the age of 60.
Since 6 April, members have been able to keep the earlier retirement age they had before A-Day, providing they meet certain circumstances which for personal pensions means being or having been in a “prescribed occupation”, such as a footballer or athlete.
But under the old rules this meant even though a member could take benefits from say the age of 40, if they had contracted out the ‘protected rights’ part of the fund could not be used for benefits until they reached the age of 60.
At the moment the Department for Work and Pensions (DWP) is consulting on whether to remove all the restrictions surrounding 'protected rights', however as part of pensions simplification the DWP already removed the minimum age 'protected rights’ could be taken from through the Pensions Act 2004.
This means the age at which benefits can be taken is governed by HM Revenue and Custom (HMRC) rules, so if a member has a ‘protected pension age’ in a registered pension scheme, along with ‘protected rights’, all the benefits can be taken at the earlier retirement age.
Maureen Duckworth, pensions technical manger at Scottish Life, says it is important for advisers to be aware of this issue, as any payments, including a pension commencement lump sum (PCLS), made before the normal minimum pension age will be treated as an unauthorised payment and taxed up to 70% if some money remains in the pension scheme.
She points out the new rules mean the fact that ‘protected rights’ may be present in a scheme does not stop someone from being able to use their ‘protected pension age’.
Duckworth adds: “Advisers who have clients looking to take benefits at their ‘protected pension age’ should check whether ‘protected rights’ exist in that scheme as well. If protected rights are present they should make sure these are paid at the same time, as finding out later is costly.”
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