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DB transfers risk losing enhanced protection

Savers transferring out of defined-benefit pension schemes run the risk of losing their enhanced protection, according to Standard Life.

Since A-Day, the most common ways of members losing enhanced protection, where a fund which exceeds the lifetime allowance is protected from a 55 per cent tax charge, is if members make a contribution to a defined-contribution scheme or accrue relevant benefits under a defined-benefit scheme after April 6 this year.

But Standard Life marketing technical manager Andrew Tully says he has encountered a number of cases in recent weeks where people are losing enhanced protection simply by transferring from one scheme to another.

If an individual with benefits in a defined benefit scheme has registered for enhanced protection but then decides to transfer from the defined-benefit scheme to a personal pension after A-Day there is a check at that point to determine whether the individual retains their enhanced protections status.

Tully warns that the HMRC regards the transfer as a benefit crystallisation event.

The check determines whether “relevant benefit accrual” has occurred. This is calculated by multiplying by 20 the pension benefit under the defined benefit scheme at A-Day.

This figure can then be increased up to the date of the transfer by the higher of various indexation figures, such as the increase in the retail price index. The indexed amount, or the appropriate limit, is then compared to the transfer value.

But if the transfer value exceeds the limit and the transfer takes place, the enhanced protection is then lost.

Tully says despite presenting evidence of the problem to the HMRC it has refused to consider using a factor other than 20 in the valuation.

Tully says: “These rules mean that people will be forced to stay in DB schemes unless they are willing to lose a chunk of their pensions benefits in tax.”

An HMRC spokesman says: “The benefit accrual test on transfer has to relate to the sums and assets being transferred, as there is no pension to be tested at that time. There are no plans to change the 20:1 valuation rule, as to introduce variations on this principle would make the transitional protection rules more complex. Even if enhanced protection is lost on transfer, the individual can still rely on primary protection of pre-A-Day rights EP is intrinsically generous, and so requires clear rules to prevent undue growth in pension rights after A-Day.”

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