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Adviser  >  Technical Central  >  Forum Archive  >  Section 32 Buy Outs and Tax Free Cash

Section 32 Buy Outs and Tax Free Cash

Original Post
117676 
Posted - 25/05/2004 : 11:57:02
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Can someone please clarify the following?

If a transfer is undertaken now from a SASS to a 32 which has both Pre 87 and Post 89 members with enhanced TFC %'s, what is the situation concerning the payment of TFC after A Day? I have been told that if the TFC is less than £375,000, then any protection will be lost if the benefits are not fully vested, and that the only way around this is to use a Clustered section 32 contract, which i thought were no longer around.

If Enhanced Protection is chosen, does this have an effect on securing the TFC which is >25%?

One thought I have had is to place the contract into drawdown and take the £1 per year minimum income after A Day. Is this feasible? Is it known whether this will be allowed to happen yet?

Help!

Steve


Jamie
Scottish Life Administrator 
Posted - 25/05/2004 : 14:36:23
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Steve, the basic position for TFC is that if someone is entitled to more than £375,000 or more than 25% of the benefits value at A-Day, they can still keep this entitlement. How this works in practice depends on the type of protection taken (if any) at A-Day.

If no protection is required but the value of the TFC is more than £375,000 or 25% of the benefits value at A-Day, it looks like the higher amount will still be available after A-Day. The TFC amount will be valued at A-Day and then increased in line with the lifetime allowance (LA) up to the 'crystallisation' of benefits (i.e. retirement).

Primary protection operates on the same basis - i.e. the amount of TFC available is increased in line with the LA up to crystallisation.

With enhanced protection, the TFC again will be valued at A-Day but this time, it's recorded as a percentage of the fund value. For example, if a £600K benefits value can provide £400K TFC, 66% (or thereabouts ) of the fund can be taken as TFC. As there's no test against the LA at crystallisation date for enhanced protection, it's simply 66% of whatever the benefits value is at crystallisation which can be taken as cash.

For most people who are well below the LA or 25% cash, there’s no need to protect this at all as under the post A-Day regime, the maximum TFC available will be 25% of the LA at crystallisation. This will probably be higher than what would be available under the current regime.

As you mention clustered s32 plans, I take it you're talking about the recent article by Abbey for Intermediaries? If so, clustered s32 plans are in fact available but the point is that under the current regime, the Revenue will not allow phasing of benefits from these plans - all the clusters must vest at the same point. Of course, after A-Day, this requirement will be removed so phasing a s32 becomes a possibility.

The wording of the article isn’t strictly correct either – it is simply not the case that TFC protection will be lost if benefits are not fully vested. This would only be the case if, for example, a client was in a single ‘arrangement’ s32 after A-Day but needed to transfer to get access to phased retirement/income drawdown. On transfer, it looks like the TFC protection will be lost. And who’s to say (certainly not Abbey) that providers will not offer multi arrangement s32s with self investment facilities after A-Day? We’re certainly looking at our current pensions range with a view to the opportunities post A-Day.

Sorry to bang on about this but is it really fair to suggest that clients set up a s32 before A-Day which cannot offer phased retirement just now but which can after A-Day? I suppose that any provider could say that! And anyway, who’s to say Abbey for Intermediaries will still be around after 6 April 2006? – anything could happen!

With regards to transferring to drawdown after A-Day, yes this is certainly a possibility but the problem is that the Finance Bill says that tax free cash will be based on 25% of the fund value being used to provide that particular income at the time (although the Bill doesn't quite put it as simply as this..). In other words, someone wouldn't be able to take 25% TFC from a £400K fund value if only £50,000 was being used to provide the £1 p.a. income.

On top of all this, it still isn't entirely clear if protection/TFC protection will continue to apply on transfers after A-Day (the consultation suggested protection wouldn't continue on transfer). From what we know just now, it looks like TFC protection will continue to apply to someone transferring after A-Day as long as they opted for enhanced or primary protection at A-Day. But anyone not opting for enhanced or primary would lose the right to a higher TFC amount.

We simply can’t give any definitive answers just now until we see all the subordinate legislation in the form of statutory instruments so the above is based on what we know to date.

I do, however, trust this helps to clarify the position?


Incidentally, you may find this article on TFC and protection useful:

https://www.technical-central.co.uk/techcentral/admin/view.asp?ID=247


096723 
Posted - 25/05/2004 : 16:01:42
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Following on from this, could benefits be retained within the SSAS, with TFC=fund value for a member, say £700,000 fund & TFC, opt for enhanced protection, so that TFC remains 100% of the fund, and then draw benefits all as TFC in stages (phased) post A day - a tax free income for life & IHT effective transfer down generations if children become members of the SSAS?

Jamie
Scottish Life Administrator 
Posted - 25/05/2004 : 16:35:59
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In short - yes, TFC up to 100% of the 'benefits value' (fund value for money purchase, 20 times annuity for final salary) would be permitted - as long as it's within pre A-Day Revenue limits.

This could be 'enhanced protected' and assuming
1. the trustees/SSAS provider allow the plan to be split into many 'clusters' or 'arrangements' and
2. phased retirement directly from the SSAS is allowed,

potentially, each time the client takes benefits, it can be paid all as cash.

At the moment, however, it looks like where enhanced protection applies and the member transfers after A-Day, they'll still get the higher TFC amount. It's only those who haven't gone for protection (primary or enhanced) that would lose the higher TFC on transfer.

In the scenario you describe, therefore, the client could transfer out of the SSAS to a SIPP after A-Day, get the higher TFC amount, get wider investment facilities, and phase/drawdown benefits.

Hope this helps!





096723 
Posted - 26/05/2004 : 09:21:49
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Take your point but by transferring to SIPP you would lose the facility to pass down to the next generation past age 75 (assuming the children are scheme members)

Jamie
Scottish Life Administrator
Posted - 26/05/2004 : 09:56:07
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Yes - didn't pick that point up!

I agree with what you're saying but (isn't there always a 'but'!) I reckon there copuld be practical issues. Whilst the Finance Bill doesn't appear to restrict the phasing in of just TFC, different 'arrangements' would have to be set up in order to do this presumably by 'notionally earmarking' the member's fund.

After age 75, we'd be in the realms of alternatively secured income. In the scenario where someone can get 100% cash, ASI wouldn't be available as all the cash would have to have been taken at that point.

In other cases, where all the TFC/income hasn't been taken, then yes, this could be used within the scheme to benefit other members.

Trust this makes sense!


                                                                                                         

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