Pensions Simplification

Registered pension scheme members can protect their pre A Day funds from the lifetime allowance charge and their pre A-Day rights to a tax-free lump sum in excess of the new limits.

Where an individual has pension rights valued in excess of £1.5 million at A-Day, they can register that value within 3 years after A-Day - for the purposes of what is known as primary or as an alternative enhanced protection.

Under primary protection registered values will be expressed as a percentage of the statutory lifetime allowance. For example, for a member who has a fund of £2.25m at A-Day the percentage will be 150%. By expressing the A-Day value in percentage terms, this will be automatically indexed in parallel with the indexation of the lifetime allowance.

When the pension vests the individual can take benefits, in this example up to 150% of the value of the statutory lifetime allowance in that year, without incurring the recovery charge. Primary Protection will also protect any tax-free lump sum entitlement over £350,000 (i.e. 25% of the £1.5m limit). After A-Day, the protected member can take the amount of the pre A-Day lump sum rights increased to the extent as the increase in the lifetime allowance.

An alternative approach for the protection of pre A-Day pension funds is available called Enhanced Protection. Under this approach, post A-Day increases in the value of pension funds and benefit rights accrued before A-Day will be protected from the recovery charge.

Where an individual chooses to elect for enhanced protection this will mean:

For a member of a defined contribution scheme, all post A Day fund growth will be exempt from the lifetime allowance charge. There must be no further contributions but contracted out rebates of National Insurance Contributions received after A Day will not count as contributions for this purpose unless contracting-out commenced for the first time after 06 April 2006.
For a member of a defined benefit scheme, pre A Day pension rights may be based on earnings when benefits are first taken, rather than on historic earnings. It will be the date when benefit is first taken from the defined benefit scheme that sets the maximum final pensionable salary for the member concerned. Final pensionable salary for this purpose must then be no greater than that determined using prescribed rules.
The individual must become an "inactive member" under the defined benefit scheme. This is a member whose pensionable service has ceased before A Day or where there has been no Relevant benefit accrual.
Relevant benefit accrual will only be deemed to have occurred if the value of pension rights on retirement has increased by more than 5% compound per annum from 5 April 2006.

Individuals with enhanced protection can revoke this at any time up to age 75 in favour of primary protection but only if the fund exceeded £1.5m at A day. For those who resume active membership of a defined benefit scheme, protection from the recovery charge will be determined by their A-Day pension value.

Find out more about primary and enhanced protection

At A-Day, those in occupational schemes who have not registered for transitional protection will be entitled to a tax-free lump sum of over 25 % of the value of their pension benefit. At vesting they will be able to take the tax-free lump sum to which they were entitled at A-Day, increased by the increase in the lifetime allowance to the date of vesting.