Stand-out Q – fixed protection…

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WED, 17 DEC 2014

Our Technical Hub provides access to a wide range of pension tax and trust technical resources. Every now and then we post tweets covering stand out questions from our technical content and our answers in case others might also find them helpful. As Twitter’s character restrictions only allow for the bare bones of the Q&A we link to the details here, too.

Question

An individual successfully applied for Fixed Protection (FP) 2012, giving them a LTA of £1.8m. In May 2014 they fully crystallised their pension fund then worth £1.62m, taking the maximum PCLS and designating the remaining fund to capped drawdown, with the intention of taking maximum income withdrawals. The individual continued to work in their own company and due to a profitable year there was the opportunity to make a £100,000 contribution into a SIPP for them. What are the implications of doing so?

Answer

A relievable pension contribution to a money purchase arrangement results in benefit accrual, and one of the conditions of retaining fixed protection is that there can be no further benefit accrual. The payment of the contribution would therefore result in the loss of FP12, and the reversion to the standard lifetime allowance. The individual had unused annual allowance from previous years to cover the £100,000 contribution.

Given the individual fully crystallised all their pension rights, the only other benefit crystallisation event (BCE) that may subsequently occur is when they reach 75 (BCE 5a). In effect this tests the growth on the drawdown fund, but if they intend to take the maximum income withdrawals, there would have to be exceptional investment growth to balance the effect of the large income withdrawals.

However, for the purposes of determining the amount of LTA an individual has left, in most instances you can simply look at the percentage of unused LTA, i.e. 10% in this scenario. Therefore by making a contribution and losing FP12, the individual will still be left with £125,000 of unused LTA, despite having crystallised more than £1.25m in May 2014.

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