Tech talk

Protected Rights post A-day (Update) - TT24/06

The content of Tech Talk (TT19/06) was based on what we understood to be the current legislative position. Unfortunately we were not aware of the amendments contained within The Taxation of Pension Schemes (Consequential Amendments) Order 2006. Having had the opportunity to review the content of the order what follows is the updated version of TT19/06.

The age at which protected rights can be taken and the availability of a lump sum in respect of these rights were covered in an earlier Tech Talk (TT07/06).

The form in which income may be taken from such rights depends upon whether the scheme is an Occupational Pension Scheme (OPS) or a Personal Pension Scheme (PPS) and the rules of the particular scheme. Looking at the legislation reveals that income drawdown is not an option under an OPS, leaving scheme pension and lifetime annuity as the only methods of taking income from protected rights. The legislation places further restrictions on the type of pension/annuity, for example:

• Unisex rates must be used to determine the level of income available
• Where the member is married or in a civil partnership at the time effect is given to these rights provision must be made for the continuation of the pension/annuity in the event of the death of the member to a spouse or civil partner at a rate of 50% of the member's pension/annuity (100% for the remainder of a five year guarantee period where the member dies during that period and 50% thereafter)

The requirement for increases during payment was removed with effect from 6 April 2005.

Where the scheme in question is a PPS, taking income from the protected rights can be done via income drawdown, if offered by the scheme, in addition to the methods outlined above. Income drawdown pre age 75 is subject to the unsecured pension income limits and from age 75 and beyond it is subject to the alternatively secured pension income limits. In both cases the same GAD rates apply as for non-protected rights.

In the event of the death of a member, before age 75, drawing his protected rights via income drawdown, the remaining fund may be used as follows:

• Where the member is survived by a spouse or civil partner income drawdown may continue. The income limits applicable to the survivor are based on his/her age.
  
  As an alternative to income drawdown the survivor may choose at any time to use the remaining fund to purchase a scheme pension or lifetime annuity (no guarantee period is available).
  
  
• Where the member is not survived by a spouse or civil partner the remaining fund less a tax charge of 35% will be payable to any person named by the member in writing, or to his/her estate where no such nomination has been made. In either case the payment will form part of the member's estate for IHT purposes.
  
  
• In the event of a surviving spouse/civil partner subsequently dying during income drawdown the remaining fund (subject to charges - see below) will be payable to any person named by the survivor in writing otherwise to his/her estate. The payment will form part of the survivor's estate for IHT purposes. The age of the survivor at the date of death will determine whether or not such a payment is an authorised payment. On death before age 75 the payment falls within the definition of an unsecured pension fund lump sum death benefit and therefore is an authorised payment. On death after age 75 the payment is unauthorised.
  
  For IHT purposes where the survivor dies before age 75 the amount taken into consideration would be the remaining fund less a tax charge of 35%. Where the survivor dies on or after age 75 the IHT charge is applied to the remaining fund before the charges associated with the unauthorised payment are taken into account.

In the event of the death of a member, on or after age 75, drawing his protected rights via income drawdown, the remaining fund may be used as follows:

• Where the member is survived by a spouse or civil partner income drawdown may continue. The income limits applicable to the survivor are based on his/her age.
  
  As an alternative to income drawdown the survivor may choose at any time to use the remaining fund to purchase a scheme pension or lifetime annuity (no guarantee period is available).
  
  
• Where the member is not survived by a spouse or civil partner the remaining fund will be payable to any person named by the member in writing, or to his/her estate where no such nomination has been made. In either case the remaining fund will be taken into account for IHT purposes. Such a payment is an unauthorised payment and as a result the charges associated with this type of payment would also apply.
  
  
• In the event of a surviving spouse/civil partner subsequently dying during income drawdown the remaining fund (subject to charges - see below) will be payable to any person named by the survivor in writing otherwise to his/her estate. The age of the survivor at the date of death will determine whether or not such a payment is an authorised payment. On death before age 75 the payment falls within the definition of an unsecured fund lump sum death benefit and therefore is an authorised payment. On death after age 75 the payment is unauthorised.
  
  On the death of the survivor the remaining fund forms part of the member's estate for IHT purposes and the charges that apply, in addition to any IHT charge, depend on the age of the survivor at the date of death. Under age 75, a 35% tax charge would apply. Age 75 or over, the charges associated with an unauthorised payment will apply.

It is worth mentioning that there is no specific reference in the DWP legislation as to the position on death after age 75 and the above is our interpretation of the legislation as it currently stands. Advisors should bear in mind that other providers may place a different interpretation on certain aspects of the legislation.

John B. Dunn - June 2006