Tech talk
Protected Rights post A-day - TT19/06
The issue of giving effect to protected rights post A-day
has been raised by a number of IFAs. This has prompted us
to re-examine the appropriate legislation and some of our
conclusions are set out below.
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.
However, as things stand at the moment, the pre A-day limits
of 100% (max) and 35% (min) GAD apply, with reviews required
at three-year intervals. In addition no drawdown-to-drawdown
transfers are possible in respect of these rights and current
legislation does not allow for a move to ASP on reaching age
75. Therefore where a member wishes to draw all of his/her
rights under a PPS via income drawdown two sets of rules will
apply (assuming no change in current legislation) if both
protected and non-protected rights exist. Because the ASP option is currently not available in respect of the protected
rights, on reaching age 75 the member will be required to
secure these rights via a scheme pension or lifetime annuity
with the same constraints as outlined above. Note that the
requirement to make provision for a spouse or civil partner
will depend on the member's status at that time.
In the event of the death of a member 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 under age 75 income drawdown may continue until the
earlier of the 75th birthday of the spouse/civil partner and
the date the member would have reached 75. The income limits
applicable to the spouse or civil partner are based on his/her
age. Alternatively the spouse or civil partner may choose
to use the remaining fund to purchase a scheme pension or
lifetime annuity (no guarantee period 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 be taken into account for IHT purposes
- In the event of a surviving spouse/civil partner
subsequently dying during income drawdown the remaining fund
less 35% will be payable to any person named by the surviving
spouse/civil partner in writing otherwise to his/her estate.
Again IHT may apply
- In the event of a surviving spouse/civil partner,
whether through choice or otherwise, reaching the end of the
income drawdown period the remaining fund must be used to
secure a scheme pension or lifetime annuity (no guarantee
period available).
The table below summarises some of the current differences
between protected rights and non-protected rights drawdown.
| |
Protected Rights drawdown |
Non-Protected Rights drawdown |
| Frequency of reviews |
Every 3 years |
Every 5 years |
| Maximum income |
100% GAD |
120% GAD |
| Minimum income |
35% GAD |
Nil |
| ASP on reaching age 75 |
No |
Yes |
| Return of fund less 35% on death |
Only if there is no surviving spouse/civil partner.
Subject to IHT |
Yes |
| Drawdown-to-drawdown transfer |
No |
Yes |
| Max age for dependant's income withdrawals |
Earlier of member's and dependant's age 75 |
Dependant's age 75 |
Comment
Please note that these conclusions are based on legislation
as at the time of writing this Tech Talk. Earlier this year
the Government published its response to the consultation
exercise on the taking of contracting out benefits (see Tech
Talk TT07/06) and the following statement was contained in
the published document, "Using consequential powers contained
in the Finance Act 2004, the DWP legislation will be amended
so that the income drawdown rules applying to protected rights
will be in line with the general HMRC rules for income drawdown
from April 2006." We have no indication as to when the
amendments will be published or how far the amendments will
go and therefore we must wait for the publication of the amending
legislation in order to comment further.
John B Dunn - May
2006