Transitional Protection
Protecting your pension benefits
Note by Civil Service Pensions
for members of the Principal Civil Service Pension Scheme (Northern Ireland) PCSPS(NI)
for members of the Principal Civil Service Pension Scheme (Northern Ireland) PCSPS(NI)
Introduction
HMRC has now published the “Protection of Existing Rights” form. Anyone who wants to apply for Primary Protection and/or Enhanced Protection must complete this form.
The Protection of Existing Rights form is available from the HMRC website
and you can access HMRC’s guidance notes here.
and you can access HMRC’s guidance notes here.This note supplements HMRC’s guidance notes. Please note that this additional guidance is intended to deal with benefits provided under PCSPS(NI). It reflects Civil Service Pensions understanding of the new tax regime but, if you are unclear on any points and, in particular how to handle pension benefits from other schemes or arrangements, you may need to take advice.
Part 1 – Your details
These questions are largely self-explanatory.
However, please note (question 1.6) that if you are amending an existing notification you are required to fill in the complete form – not just the bits that have changed.
It follows that, unless you have a good reason to rush (for instance, you are about to retire) it makes sense to wait until you are sure you have full and correct information before filling in the form.
In particular, don’t forget that your pay rise effective from 1 August will affect the value of your pension rights at 5 April 2006. That said, your pay rise is unlikely to find its way through to the pension records much before the autumn. In other words, your pensions administrator is not going to be able to give you correct figures for some months.
You have until 5 April 2009 to apply for transitional protection
Part 2 – Which type of protection are you notifying?
Primary Protection is a must if your benefits at 5 April 2006 are valued at more than £1.5m. Primary protection will give you an individual Lifetime Allowance (LTA), which reflects the value of your benefits.
Example
James has benefits valued at £3m at 5 April 2006– primary protection gives him an individual LTA of 200% (£3m divided by £1.5m)
Enhanced Protection is a complex area and the pros and cons vary considerably from person to person. See the HMRC website pages for more information, Key things to bear in mind are that
- Enhanced Protection is not compatible with making any contributions at all to a money purchase pension on or after 6 April 2006;
- Enhanced Protection does not prevent you from carrying on in the PCSPS(NI). However, if you want to retain your Enhanced Protection on drawing (crystallizing) benefits you may need to give up some of your pension to prevent “relevant benefit accrual” at that time. You would have to decide – in advance - whether or not this meant that staying in the scheme was good value for money. Alternatively, you would give up Enhanced Protection on retirement and pay LTA tax on your benefits insofar as they exceeded your remaining LTA at that point
- Enhanced Protection also gives protection against the Annual Allowance charge.
You can apply for either or both of Primary Protection and Enhanced Protection.
Part 3 – Enhanced Protection
3.1 – Have you been an ‘active’ member of a registered scheme at any time after 5 April 2006?
Please note the careful use of quote marks in this question. ‘Active’ is not necessarily the same as “active” as defined in scheme rules or section 151(2) Finance Act 2004. The question really means, “have you had relevant benefit accrual…?”.
For a defined benefit scheme such as classic, premium or classic plus, relevant benefit accrual is tested only when you draw (crystallize) benefits. So, while it might feel rather counter-intuitive, if you have only carried on with pre-6 April 06 membership of your PCSPS(NI) arrangement, the answer to this question is “NO” and you can apply for Enhanced Protection.
For a money purchase scheme – and this includes the Northern Ireland Civil Service Additional Voluntary Contribution scheme (NICSAVCs) - the partnership pension account and the designated stakeholder account – relevant benefit accrual occurs if you make a contribution or if a contribution is made on your behalf (eg the employer’s contribution in partnership). So, if any money at all has gone into any of these arrangements after 5 April, you are barred from applying for Enhanced Protection.
3.2 – Did you have pension rights that had not yet come into payment in a pension scheme funded or partly funded by an employer on 5 April 2006?
The answer will be “YES” if any of the following apply at 5 April 2006:
- You are an active (contributing) member of any of the PCSPS(NI) arrangements (excluding the partnership pension account – if you are still contributing to this you are debarred from Enhanced Protection – see 3.1 above)
- You have rights in – but have stopped contributing to – any of the PCSPS(NI) arrangements (including the partnership pension account)
- You are a deferred member of any of the PCSPS(NI) arrangements (including the partnership pension account)
- You have deferred (frozen) pension benefits in another employer’s pension scheme
- You have any investments in the NICSAVCs (this does not include payments made solely for additional death-in-service cover) or any other employer’s AVC scheme
Don’t forget that, if you left with an early retirement package and you are still receiving an “annual compensation payment”, then your pension is frozen for payment (normally at age 60) and needs to be valued accordingly.
3.3 – Were the pension rights for the employment (or for each employment if more than one employment) within the maximum value permitted?
The PCSPS(NI) rules are such that you can answer this question “YES” (note that this may or may not be the case if you have any rights in non-Civil Service schemes)
3.4 – Have you surrendered your excess rights?
This question will not apply to your PCSPS(NI) benefits.
3.5 – Did you have lump sum rights exceeding £375,000 on 5 April 2006?
To answer this, you need to work out the value of your lump sum rights. There are two steps to this; you add them both together.
Step 1 - Value of your lump sum rights on 5 April 2006 that had not come into payment
This applies to scheme(s) that you are either an active or deferred member of.
Name of Scheme |
Description |
|---|---|
| classic | This scheme proides an automatic lump sum and you take this value at 5 April 2006. The value will be net of any WPS (contribution) debt that you might have and it is also net of the effect of any pension debit that you may have sufferred as part of a divorce settlement. In other words, the value is the amount of lump sum you would get if you retired on 5 April 2006 (assuming that you were able to do so without your benefits being adjusted for early payment. |
| premium | This scheme gives you the option of sapping some of your pension for a lump sum. We will be able to tell you the maximum amount of lump sum you could take under the scheme rules. This is normally 2.25 x the amount of your pension. But, if you transferred across from classic on 1 October 2002, it may be a little higher. |
| classic plus | Follow classic rules for the pre-1 October 2002 element, and premium rules for the post-1 October element. Again, your administrator will be able to give you the figures. |
| NICSAVCs | You have no rights to a lump sum at 5 April 2006. |
| partnership | 25% of the value of your fund as at 5 April 2006. |
Example
Bernard is a member of classic. He has 35 years’ service and his last 12 months’ pay (at 5 April 2006) is £160,000. He has a WPS debt of 1 year (dates back to 1972-3)
Bernard also has £30,000 invested in NICSAVCs with Scottish Widows.
Bernard’s classic benefits at 5 April 2006:
Pension = 35/80 x £160,000 = £70,000
Gross lump sum = 3 x pension = £210,000
WPS debt = 1.5/80 x £160,000 = £3,000
Net lump sum = £210,000 - £3,000 = £207,000
Bernard has no lump sum rights in his Scottish Widows AVC.
Step 2 - Value of your lump sum rights on 5 April 2006 that had come into payment
This is not entirely straightforward as the amount to be disclosed is a notional figure and is not the amount of lump sum(s) you have actually received.
Lump sum rights in payment = 25% x 25 x pensions in payment at 5 April 06
Example
Bernard also has a pension in payment at 5 April 06 of £40,000pa. The scheme paid Bernard a lump sum of £120,000 when he drew his pension last year.
Bernard’s lump sum rights = 25% x 25 x £40,000 = £250,000
So Bernard’s total lump sum rights at 5 April 2006 = £207,000 + £250,000 = £457,000 and he will therefore answer “YES” to question 3.5
Note that, if your lump sum rights are less than £375,000 your ability to take tax-free lump sums in the future will be restricted – at each crystallization event – to the lesser of (a) 25% of the value of the benefits being crystallized and (b) 25% of your remaining standard LTA (not your remaining personal LTA if this is different)
3.6 – Value of your lump sum rights on 5 April 2006 that had not come into payment
You only need give this figure if you answered “YES” to question 3.5. The amount will be as calculated in step 1 above (ie, £207,000 in the example of Bernard)
3.7 – Value of your pension rights on 5 April 2006 that had not come into payment
To calculate this, you need a full list of all of your pension benefits that had not come into payment at 5 April 2006.
- Value any money purchase arrangements at the fund value as at midnight on 5 April
- Value any lump sums as in step 1 of question 3.5 (above) except that you should only include lump sums that are automatic. Where lump sums are optional – for instance, as in premium – you should value the whole of your pension as “pension” (see below)
- Value any pensions not yet in payment by taking the value times 20.
Example (questions 3.6 and 3.7)
Jane has 5 years’ service in premium and is paid £180,000 a year. Jane also has a money purchase pot of £2m from her previous jobs.
Jane’s lump sum rights (Q3.6)
Money purchase - 25% x £2m = £500,000
premium - 2.25 x 5/60 x £180,000 = £33,750
Total for Q3.6 = £533,750
Jane’s pension rights not yet in payment (Q3.7)
Money purchase - the value of the pot = £2m
premium - 20 x 5/60 x £180,000 = £300,000
Total for Q3.7 = £2.3m
The answers to Q3.6 and Q3.7 together set the maximum percentage of benefits which can be taken at each and every crystallization event which relies on Enhanced Protection. In Jane’s case this is 23.2% (£533,750 / £2,300,000) and will be shown on Jane’s Enhanced Protection certificate)
Assume that Jane’s pension increases from £15,000 (5/60 x £180,000) to £18,000. Also assume that, when Jane draws pension, relevant benefit accrual has not occurred so Jane keeps her Enhanced Protection.
The maximum lump sum that premium will pay is 2.25 x £18,000 = £40,500. This would reduce Jane’s pension to £14,625 and the combined value of her pension and lump sum, for crystallisation purposes, would be 20 x £14,625 + £40,500 = £333,000. Jane’s lump sum is worth less than 23.2% of this amount so this is OK.
However, when Jane comes to draw her money purchase pension she will only be able to take 23.2% of her fund (rather than 25%) as a tax-free lump sum.
Part 4 – Primary Protection
4.1 – value of your pension rights on 5 April that had not come into payment
This will be the value as calculated at Q3.7 (see above). However, please note that you need to split this into (a) schemes funded or partly funded by an employer and (b) personal pension and Retirement Annuity contracts. The NICSAVC scheme operates independently of the unfounded main scheme and so you should record any AVC funds (eg with Scottish Widows, Standard Life or Equitable Life) in box (b).
For PCSPS(NI) pension benefits, you can answer “yes” to the question as to whether or not the pension rights were within the maximum value permitted.
4.2 – Value of your pension rights in payment on 5 April 2006
This is 25 times the total of all your pensions in payment on 5 April 2006. Do not include state pensions or any pensions from tax-unapproved arrangements.
Example
Celia has a pension in payment of £80,000pa at 5 April 2006.
Value of pension in payment = 25 x £80,000 = £2m
4.3 – Did you have lump sum rights exceeding £375,000 on 5 April 2006?
Calculate your lump sum rights as shown for Q3.5 above. This is the total of lump sum rights relating to pensions in payment and pensions not in payment.
4.4 – Value of lump sum rights on 5 April 2006 that had not come into payment
You only need give this figure if you answered “Yes” to Q4.3.
This will be the same amount as calculated for Q3.6 above and is your “protected lump sum” amount. You will be able to take tax-free lump sums up to this level only (as increased by the same annual percentage increases as the standard LTA)
Example (Q4.3 and Q4.4)
Thomas has a pension in payment of £60,000pa. He also has a personal pension pot of £100,000. Thomas has 3 years’ service in premium and he is paid £90,000 a year. Thomas is registering for Primary Protection only.
Thomas’s lump sum rights on his pension in payment = 25% x 25 x £60,000 = £375,000
Thomas’s lump sum rights on his personal pension pot = 25% x £100,000 = £25,000
Thomas’s premium pension rights at 5 April 2006 = 3/60 x £90,000 = £4,500. He also has associated lump sum rights = 2.25 x £4,500 = £10,125
So Thomas will answer “Yes” to Q4.3 (his total lump sum rights are over £375,000) and he will register £35,125 (ie total of personal pension plus premium lump sum rights) in Q4.4 as his protected lump sum rights.
If Thomas then retires and draws benefits from premium in tax year 2007-8, his protected lump sum rights have then risen in line with the increase in the basic LTA to £35,125 x £1.6m/£1.5m = £37,470. Suppose Thomas takes a lump sum of £12,000. This will leave him lump sum rights of £25,470 to take when he draws his personal pension. Alternatively, if Thomas drew his personal pension first, he could take the whole £37,470 as a lump sum from his personal pension but would then have no lump sum rights left for his premium pension
4.5 – Are the pension rights that have not yet come into payment on 5 April 2006 money purchase rights, valued by underpinning assets?
The answer is “Yes” only if you can influence the investments the scheme can make (for instance, if you have a SIPP). If your money purchase rights are only in the NICSAVC scheme, the answer would be “No”
Where to send the form
You should send your completed transitional protection form to:
HMRC
Audit & Pension Schemes Services
Yorke House
Castle Meadow Road
NOTTINGHAM
NG2 1BG
Audit & Pension Schemes Services
Yorke House
Castle Meadow Road
NOTTINGHAM
NG2 1BG
Do not send the form to your income tax office.
Find out more
If you have any queries, please contact us on 71 319000 or you can email us at