While the new system’s main aim is to simplify administration, the government
also believes that the investment and benefit opportunities open to pension
scheme members will be improved. There is, however, a risk that the new rules
will prove disadvantageous to some.
For example, there is the possibility that individuals, through the normal
operation of existing rules, could already have built up a pension fund in
excess of the lifetime limit of £1,500,000. Without some form of protection,
these individuals would be unfairly penalised by tax charges on vesting.
Additionally, some members would have a greater entitlement to tax-free lump
sums under the existing rules than would be permitted under the new rules.
For individuals caught by either of these traps, the government has provided
the ability to “protect” their pre-A Day rights. The original proposals in the
2002 discussion document were quite loosely drawn, and have been superseded in
the 2003 document by some more complex rules. Put simply, the current proposals
for protection against tax charges on vesting are:
- “Primary Protection” – Members with fund values in excess of £1.5M
at “A Day” will be allowed to treat that greater value, increased in line
with the retail prices index, as their personal lifetime value.
- “Enhanced Protection” – Members who “cease active membership” of
approved pension schemes prior to “A Day” and do not resume membership
after “A Day” will be exempt from any tax charges at vesting. In this
context, “ceasing active membership”, appears to mean making no further
contributions to any approved schemes. If a member subsequently resumes
active membership, his rights will revert to primary protection.
The currently proposed rules on tax-free lump sums will allow any scheme
that would permit, if rights vested at “A Day”, a lump sum greater than 25%
of fund value, to pay out that increased sum when rights eventually vest
post-“A Day”. The lump sum entitlement at “A Day” will be increased in line
with the retail prices index.
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