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Risk facing protection

Pension scheme members opting for enhanced protection but wanting to continue money-purchase life cover risk losing their protection unless new contributions are funded from the existing pension fund.

Changes to the Revenue’s approach to the classification of death benefits means the treatment for tax purposes now depends on the benefit promise rather than on how they are funded.

This means any scheme member, DB or DC, wanting to continue, take out or increase money-purchase life cover on or after A-Day will have to eat into their existing pension pot to fund this or lose their enhanced protection.

Scottish Equitable pensions development director Stewart Ritchie says this is unlikely to be tax-efficient and may increase admin costs so those affected will probably be better served looking for sep- arate life cover.

He says that from next April for money-purchase schemes the payment of death benefits as a lump sum will lose the scheme member’s enhanced protection. DB scheme members where the death benefit lump sum is above the appropriate limit will also lose out.

Ritchie says: “This has implications for anyone opting for enhanced protection for pension benefits and increases the situations in which enhanced protection could be lost if the wrong action is taken for any death benefit provision on or after A-Day.”

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