In amongst the technical papers issued by HMRC on the back of the budget changes, Skandia has discovered a hidden gem. An alteration in the formula for calculating tax free cash for pre 6 April 2006 (A-Day) members of occupational pension schemes could lead to people receiving more tax free cash when they retire.
Prior to A-Day, occupational pension scheme legislation determined the level of tax free cash available to members of such schemes. Since A-Day, the level of tax free cash has been set at a maximum of 25%.
Pre A-Day members of occupational pension schemes have been allowed, under HMRC rules, to protect the tax free cash rights they held at A-Day that were greater than 25%. In such cases the tax free cash entitlement can further increase over time, based on two calculations introduced by HMRC:
1. The A-Day protected tax free cash entitlement is automatically increased by the increase in the Lifetime Allowance up to 6 April 2012, an increase of 20%. All members with protected tax free cash receive this uplift regardless of how well their occupational scheme investment has done since A-Day.
2. The tax free cash entitlement is further increased by 25% of any positive growth in the value of the pension fund since A-day.
Prior to 6 April 2012, the level of investment growth was discounted by 20% of the pre A-day fund value to take account of the increase in Lifetime Allowance from £1.5m to £1.8m up to 6 April 2012. From 6 April 2012, this discount no longer applies, resulting in a higher tax free cash allowance for many people, provided they have seen positive investment performance since April 2006.
Pre A-Day member of an occupational scheme, with a pension fund valued at £100,000 on A-Day, with a protected tax free cash entitlement of £60,000. The current value of the pension fund is £140,000
Calculation for determining tax free cash amount:
Under the new post 6 April 2012 calculation, the amount available as tax free cash has increased by £5,000 from £77,000 to £82,000, an increase of over 6%.
Adrian Walker, Skandia pension specialist, comments:
“This is really good news for many people who have a protected tax free cash entitlement in an occupational pension scheme they joined prior to 6 April 2006. The new calculation can greatly enhance the amount of tax free cash these people can take at retirement. Many people may not know whether they have a protected cash entitlement from their service up to A-Day in these schemes, and it is really crucial that they check with those schemes to establish what their tax free cash entitlement was at A-Day. If they look to transfer their occupational pension scheme they need to speak to their financial adviser to ensure they protect this valuable benefit, or risk reducing their tax free cash entitlement to 25% of the value of their pension savings.”
Please note: this improvement does not apply for those who have applied for fixed protection. Their revaluation of A-Day cash is still on the pre 6 April 2012 basis which subtracts the A-Day fund value increased by 20% from the current fund value to determine whether there is any additional tax free cash entitlement.