Mailings
Tuesday 28 October 2008
Technical Update
We are just writing with information on two points which you need to be aware of:
Pension Protection
The deadline for registering clients with HMRC for Primary and Enhanced Protection is the 5th April 2009. Whilst this may still seem some way off, time flies! To complete a protection registration form the value of all clients’ pension arrangements as at the 5th April 2006 must be collated. This can take time, particularly if backdated property valuations are required.
If you have any clients with IPS who have not already registered and should do so, please let us know as soon as possible if you require any asset valuations from us to help them complete their registration forms.
Proportionality and Protected Rights
On the 7th October, clarification of the Department of Work & Pensions' stance on the treatment of Protected Rights held by SIPPs was issued. The main points which all advisers need to be aware of are:
- Retirement benefits paid from a SIPP consisting of protected rights and non-protected rights must not “erode” the protected rights at a faster rate than the non-protected rights. This means that whatever percentage of unsecured pension is paid, the percentage taken from the protected rights fund must not exceed that taken from the non-protected rights portion of the fund./li
- It is therefore not allowable to draw all of a tax free lump sum entitlement from the protected rights fund only.
- It is not permitted to put only the protected rights fund into income drawdown and defer the non-protected rights.
- A transfer-in of a protected rights plan already in USP and an unvested non-protected rights plan will require the non-protected rights plan to be vested immediately (if the plans remain as separate schemes this is not necessary).
- A non-protected rights fund can be eroded faster than a protected rights fund.
- USP limits and flexibility when drawing retirement benefits complicate the matter further. An example may help to illustrate the position:
1. A SIPP consists of £100,000 split equally between protected and non-protected rights. The maximum USP from the total fund is £10,000 p.a. and the member opts to receive £8,000 p.a. The maximum pension which can be paid from the protected rights fund is £4,000 p.a. because the fund is split equally between protected and non-protected rights.
2. Due to the USP limits, the member could choose to receive £5,000 p.a. from the non-protected rights fund and £3,000 p.a. from the protected rights - the protected rights are not being eroded at a quicker rate and the amount paid from each portion of the fund is within the member's USP maximum.
Naturally this is a complex subject and does not contribute to the intended principal of simplifying pensions. Hopefully the proposed date of 2012 for abolishing protected rights will not be allowed to drift and the above will then no longer apply.
The IPS Partnership