Adviser > Technical Central > Pre simplification > Occupational > Pensions Update 147
Pensions Update 147
The content of this page is based on our understanding of how pensions worked before A-Day, the 6 April 2006, and is provided for reference only.
Her Majesty's Revenue and Customs (HMRC) issued Pensions Update 147 - Fragmented Lump Sums - on 9 June 2004. This mainly affects transfers and the taking of benefits from occupational pension schemes for regulated individuals.
What's changed?
From 9 June 2004 all transfers involving regulated individuals from an occupational pension scheme require tax-free cash certification. Previously this was only required for transfers to a personal pension. In addition, tax-free cash has to be apportioned strictly - this applies even where protected rights are involved.
Where benefits in occupational pension schemes for the same employment are taken by regulated individuals before A-Day and:
- they have benefits in more than one scheme (excludes FSAVC schemes)
- and these benefits are not due and payable on the same day
only a proportion of the total tax-free cash payable can be taken from any one scheme.
Regulated individuals - a reminder
A Regulated Individual is a person:
- who is, or was in any of the 10 years prior to the date on which the transfer is made, a controlling director, and/or
- who is, or was, earning more than 100% of the current earnings cap in the current or any of the previous 6 years, AND are age 45 or over at date of transfer.
For everybody else - non-regulated individuals - HMRC have advised that no changes are being made. But, they do reserve the right to take a different view depending on the circumstances of individual cases - more on this later.
Why have these changes been introduced?
Transfers
HMRC are concerned that with the introduction of the new tax regime on 6 April 2006 action will be taken now to fragment transfers resulting in greater amounts of tax-free cash being available after A-Day. This will be possible, as normally 25% of the value of an individual’s benefits will be available as tax-free cash under the new regime without having to take into account tax-free cash amounts under other schemes.
To help explain, here’s the example from the Update:
Value of pension rights being transferred - £100,000
Lump sum rights - £20,000
Splitting transfer across 3 schemes
Scheme A - £50,000 - tax-free cash is £10,000
Scheme B - £30,000 - tax-free cash is £6,000
Scheme C - £20,000 - tax-free cash is £4,000
Total tax-free cash £20,000
After A-Day the actual amount of tax-free cash permitted will be 25% of the benefits value under each scheme. So assuming no growth (for simplicity!) £12,500, £7,500 and £5,000 for Schemes A, B and C respectively may be paid - a total of £25,000 - more than is available under current rules. HMRC do not have an issue with this, it’s just the effect of the new rules.
But, and this is why they have changed the guidance, if the tax-free cash had been apportioned to just one of the schemes a tax-free cash amount of £40,000 would be available. Here’s how:
Assume that the transfer took place before A-Day and the tax-free cash was all allocated to Scheme C.
Scheme A - nil
Scheme B - nil
Scheme C - £20,000
After A-Day, £20,000, plus increases in line with the lifetime allowance, would be permitted from Scheme C, with 25% of the value of scheme A (£12,500) and B (£7,500) available as well. Total is £40,000. This is the effect of having a certified amount of more than 25% of the value of benefits in one scheme, which can either be protected if enhanced or primary protection are applied for, or be allowed as there is a right to this tax-free cash under that scheme.
Taking benefits
By making the changes for regulated individuals on taking benefits, HMRC are ensuring that the new rules on transfers cannot be ‘side-stepped’. Taking your full tax-free cash before A-Day from one scheme whilst leaving other benefits would have the same effect as transferring them and not apportioning the tax-free cash. You would have benefits after A-Day where normally 25% of their value could be taken as tax-free cash even though you had already taken your full tax-free cash amount before A-Day.
Transfers affected
Care will need to be taken with transfers for regulated individuals.
All transfers from occupational pension schemes that are split between more than one receiving scheme of the same employer or associated employers are affected. This includes transfers to schemes where continuous service has been granted.
In addition, transfers for regulated individuals that are split between a personal pension (PP) and a s32 are affected. You will no longer be able to apportion the full tax-free cash amount to the s32 where only protected rights are going to the PP.
Non-regulated individuals
The advice for non-regulated individuals is less clear. The rules haven’t actually changed but HMRC has indicated that they may regard as abuse any apportionment of tax-free cash done purely to obtain more tax-free cash after A-Day.
The information provided is based on our current understanding of Pensions Update 147 and the relevant legislation and regulations and may be subject to alteration as a result of changes in regulation and practice. All references to taxation are based on our understanding of current tax law and practice and may be affected by future changes in legislation or by individual circumstances.
We cannot accept direct transfer business from members of the public. Transfers are complex and individuals should consult an Independent Financial Adviser for advice. Transfers depend on personal circumstances and may not always be in an individual's best interest. Production of a transfer value analysis is a necessary requirement of the transfer process.
Updated 6 July 2005
For professional advisers only
