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Funding for cash

Original Post
080064 
Posted - 26/10/2004 : 09:06:12
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(Moved post)

I am attempting to take advantage of the current funding rules for occupational schemes and post A-Day ability to take benefits while remaining in employment.
The client has £250,000 in a personal pension, no other pension benefits and is 58.
He is a controlling director with 25 years continuous service.
Couple of questions:

I think we can fund him for (3*25)/80 * his final remuneration (subject to earnings cap) in a brand new EPP (post 89) to be taken purely at tax free cash.
Do we have to take account of the personal pension value? I don't believe so if we are using the 3n/80th rule rather than accelerated funding but am getting conflicting views from other parties. Can you advise?

Come April 2006, he would cease funding into this plan, take the benefits as a cash lump sum. This will reduce his lifetime allowance but this is not an issue.
Can he continue in service having taken his benefits even though he is a controlling director? Under current rules, obviously not but I can't find anything in the new rules to say otherwise.

Thanks for your help

Ewan


Jamie
Scottish Life Administrator 
Posted - 26/10/2004 : 16:06:51
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(Post moved)

Ewan, as your client is a controlling director, the benefits from the PP must be taken into account when maximum funding. They will be treated as aggrgable benefits (i.e. as if provided by the occupational pension scheme). This is confirmed in para 8.9 of the Revenue Practice Notes for Occupational Schemes:

8.9 When applying the limits in paragraphs 8.5 - 8.7 to lump sum benefits for a controlling director it is necessary to treat as provided by the current employer any lump sum benefits received or receivable from retirement annuity contracts or personal pension schemes (including any pension debits derived from these sources) arising from premiums or contributions paid in respect of relevant earnings from that employer.

For non-controlling directors, it certainly would be the case that (subject to certain conditions), the retained benefit would be ignored when calculating cash on a 3n/80ths basis.

With regards to taking the benefits and remaining in service, the Revenue stated in previous consultations that this would be permitted and there's nothing in the Finance Act to prevent this. So after A-Day, it looks like the link between leaving service and retirement will no longer apply. Just a note of caution on that subject tho' - we're still awaiting the Pensions Act which may change the position.

Hope this helps!


080064
Posted - 27/10/2004 : 09:09:13
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Thanks very much for that Jamie

On a practical note, if the personal pension benefits are aggregable does that mean that the Tax Free Cash "certificate" on A-Day for the EPP will be the total tax free cash benefits minus whatever is available from the personal pension.
For example, if the maximum cash lump sum was £100,000 and the personal pension was worth £300,000 (non-protected), the maximum cash lump sum certified would be £25,000 (£100,000 minus 25% of £300,000)?

Alternatively, can we simply say that he wishes to take all the tax free cash from the EPP and therefore apply the whole amount to that - in the previous example £100,000? The personal pension would be able to provide 25% post A-Day anyway.

Thanks once again.

Ewan


096723
Posted - 27/10/2004 : 09:57:36
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Again on funding for cash - I have a Controlling Director who will have a fund of around £700k and also sufficient earnings to certify TFC of £700k at A-Day. He does not wish to provide pension and wants to empty the fund at 55.

If we elect for enhanced protection can the TFC be regarded as the equivalent percentage of the fund at 55 or, as this already exceeds the upper limit (25% of Lifetime Allowance) can it only be indexed in line with the lifetime allowance.

Also if we pay at least 1 premium after A-Day can we then use the formula for extra TFC of FAR-(A-Day fund*LA/1.5m)/4 or could he only fund for pension post A-Day.


Jamie
Scottish Life Administrator 
Posted - 27/10/2004 : 13:25:13
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Ewan, yes, the amount of TFC from the EPP will be restricted to whatever the normal maximum is, less the TFC available from the PP.

So, following on from your example, the TFC would indeed be £25,000 from the EPP with the remaining £75,000 payable from the PP.

At A-Day, the Finance Act says that benefits must be within IR limits in order to be ‘protected’, and this includes any TFC amount. In this case, the maximum will be £25,000 and so this is what the ‘certificate’ will say.

It would not therefore be possible to take all the TFC from the EPP as this will be restricted to £25,000.

I trust this clarifies matters.



Jamie
Scottish Life Administrator
Posted - 27/10/2004 : 15:19:44
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Answer to question posted by 096723 – Controlling Director with £700k fund/TFC

There are two options available to this CD on A-Day (primary protection won’t be available as value <£1.5m):

1. Don’t go for any protection.
In this case, the TFC at crystallisation will be calculated as either:
? if no further contributions paid/benefits accrued - £700k increased in line with the lifetime allowance only, or
? if further contributions paid/benefits accrued – basically £700k increased as above plus an extra bit representing the post A-Day accrual of 25%

Note however that for the TFC to remain at these levels, all benefits from the scheme have to be taken at the same time and the benefits have to stay in the same scheme (i.e. on transfer, with few exceptions, the TFC reverts to 25%)

2. Go for enhanced protection
With enhanced protection, the TFC available at crystallisation will still be £700k increased in line with the lifetime allowance (i.e. not the same percentage as would have applied at A-Day).

With regards to your final question, the option to pay a further contribution will only increase the TFC available in respect of benefits accrued post A-Day as confirmed under the second bullet of point 1 above. This, of course, is not an option if the client goes for enhanced protection.

I trust this clarifies matters.



096723 
Posted - 28/10/2004 : 14:33:04
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Many thanks Jamie but as I understand it if we pay a minimum premium after A-Day, any growth in the fund in excess of the percentage growth in the LA would be treated as post A-Day accrual and therefore 25% of this could also be taken as TFC. This would seem to argue in favour of no protection and stay with the scheme rather than transfer to S32 pre-A-day. Am I correct in my interpretation?

Jamie
Scottish Life Administrator
Posted - 29/10/2004 : 09:18:01
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Yes - the TFC caclulation changes if exta money is paid to a plan after A-Day to the formula you describe so further TFC can be built up as long as the fund growth is better than lifetime allowance increases.

I agree that not going for protection and leaving the money where it is instead of transferring to s32 would seem the sensible choice as this would give a higher TFC amount in this situation. It's simply not the case that transferring to a s32 is always the best option.

If the money can't be left where it is (e.g. on scheme wind-up), then s32 would be the safest place to transfer and there's nothing to prevent insurers changing the policy conditions to allow further contributions after A-Day - whether they will do so or not (we haven't made a decision yet) remains to be seen!

                                                                                                         

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