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Lifetime experience

Calculating how a client’s various pension funds contribute towards his lifetime limit

Over the course of my career I have built up pension entitlements in several different funds. I am now approaching retirement and have been warned I may be affected by the lifetime limit. Is this something I should be aware of?

How strange life can be. The new pension regime means that best advice for a client could be to cease being a member of a respectable final-salary scheme and in some cases means that a pension fund is not worth what you think it is worth.

I was dealing with applying for primary and enhanced protection on behalf of a client and I thought the case study was a perfect one for some knotty financial exam. This is because of the various types of pension which this client has and the different multiples and ways of working out their contribution to the lifetime allowance.

Frank is a deferred member of an unfunded final-salary scheme. He still works for the firm but, because of the other pensions he has, he has ceased being a member of the occupational pension scheme as otherwise we could not apply for enhanced protection.

I have to say it is bizarre and very alien to advise someone to come out of an occupational scheme but such is the regime we have.

In addition to Frank’s membership of the final-salary scheme, he has two plans that are in unsecured income. One had income paid before A-Day and the second, because it contained protected rights, was due to have income paid after A-Day.

I needed to wind back the clock and look at the situation on April 5, 2006.

The first pension – the final-salary part – was due to pay Frank a tax-free cash sum of 6,000 with an income of 2,000 a year. Working out the contribution towards the lifetime limit meant that we took 20 times the 2,000 annual income, as it was not yet in payment, and added on the tax-free cash sum of 6,000. This made the total contribution of this part of Frank’s pension provision to be 46,000 towards the lifetime limit. So far, so good, as clearly this was a smaller amount.

Frank’s second pension was the protected-rights portion of a contracted-out money-purchase plan that had not been triggered as at April 5. This value was taken as the value as of April 5, 2006 and was 800,000. Since then, Frank has taken his tax-free cash sum, which he has banked, and the remaining funds are in unsecured income.

The third portion of his pension scenario was the non-protected-rights part of the Comp, which for Frank was unsecured income in payment prior to April 5, 2006.

This third part of the pension had an investment value of 700,000 as of April 5, 2006. Although Frank was not drawing the maximum income possible, the maximum income was what we needed to use in order to work out the contribution towards the lifetime limit of this particular pension.

The maximum Government Actuary’s Department rate for him was 5.7 per cent, which made the maximum income he could draw of broadly 40,000 a year. This needed to be multiplied by 25, as it was already in payment, making a contribution towards the lifetime allowance of 1m. Ouch.

I must say Frank was mightily amused that suddenly his real value fund of 700,000 turned into 1m in terms of the lifetime limit but I had to explain that these were the vagaries of the calculations.

Therefore, Frank’s total contribution to the lifetime limit was 46,000 from the final-salary scheme, 800,000 of the value of a pension not yet in payment, and 1m from his unsecured income in payment. This made a total of 1.846m and gave us the relevant figure for the lifetime limit.

In this particular case, the tax-free cash was not more than a quarter of the lifetime limit, as tax-free cash had already been taken from the unsecured income, and the other tax-free sums did not amount to more than 375,000.

In another case, a client of mine has a final-salary scheme paying 76,000 income a year. He also has a residual AVC worth no more than 20,000. Because of this residual AVC, which is not yet in payment, we have applied for protection for him as otherwise there could be a sticky situation with tax on this pension.

It should be noted that one has to be very careful that minor amounts in tiny little pensions can mean that protection is needed, which might not always be evident.

Amanda Davidson is a director of Baigrie Davies

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