Protected tax free cash - but not really

msallen

This is not a question, but its not really a "vent" either, so the pensions board seemed the best place to post it. I guess its just an example of how regulation and red tape leads to bizarre situations.

I am in the process of transferring an old DC pension (IBM M Plan to be precise for anyone else who is also a deferred member of this scheme) to my SIPP and got an email this morning to say that the transfer couldn't continue until I confirmed that I was aware that I would lose my right to protected tax free cash - i.e. I was entitled to take more than 25% of it tax free and would lose this right on transfer.

This was a surprise to me as I wasn't aware of this extra benefit I apparently had under this scheme so I first checked all the documentation I could lay my hands on but found nothing. I then telephoned the administrators to enquire and they were only able to say that on 6 April 2006 (a date at which time I'd already left IBM so no new contributions have been made since), the pot stood at ~32K of which ~9.5K was tax free, i.e. a little under 28% at the time. They were unable to formally advise me whether I was safe to assume that a similar percentage of the pot was now tax free, but that was the impression given.

I then started to ask about my options and it seems that since IBM transferred administration to L&G earlier this year, it is now possible to drawdown from this pot directly without transferring - OK I thought, I'll just leave this pot separate and drawdown from this one first and exhaust it before I commence drawdown on my main SIPP (I'm planning to commence drawdown about a year from now). However at this point she had to go away and check this, and it seems that if I go into drawdown with L&G I also lose my rights, so I asked how I was able to keep these rights and actually make use of this protected tax free cash, and the answer was ... [drum roll please] ... to withdraw the entire pot in one lump sum!

[Rough calculation alert]
Hence given the pot's value is now ~110K, it seems I can increase my tax free element by ~4K - i.e. save under a grand in tax, by paying higher rate tax on the taxable element and only use one years personal allowance. Given I plan to drawdown ~20K a year, this 110K might last about 6 years (allowing for some growth) meaning if I transfer I will pay ~4K in tax over that period (as it will be my only taxable income prior to SP, which is ~10 years away), but if I elect to keep my protected tax free cash I will pay ~19K.

Needless to say I won't be doing this!

I know that the regulations mean that they have to alert me to the "benefit" I'm giving up, and that the pension administrators aren't allowed to give me advice, but I feel I could have found a more productive way to pass the morning 

wjr4

Why do you actually want to transfer it? 

wjr4

There are usually other options, you just need to get it all in writing as some call centre people do not understand it properly. 

k6chris

Is the >25% tax free based on also having an IBM DB plan 'C plan' etc)??  If so, the tax free amount is based on 25% of the total pension, so removing the DC 'M Plan' element removes this benefit.

msallen

wjr4 said:

Why do you actually want to transfer it? 

Because I'm going to be starting to draw down next year, so I'm just getting things ready for that.

msallen

k6chris said:

Is the >25% tax free based on also having an IBM DB plan 'C plan' etc)??  If so, the tax free amount is based on 25% of the total pension, so removing the DC 'M Plan' element removes this benefit.

No its all in the basic M Plan. I joined IBM literally about 5 days after they closed off the DB scheme to new employees and left again before the "improved" version (with Salary Sacrifice etc) came in. That's why I was so surprised that there was any protected element. I checked all my old docs but it wasn't mentioned anywhere so I guess it was perhaps related to some AVCs that I made for a short period.

dunstonh

This was a surprise to me as I wasn't aware of this extra benefit 

It is one of the questions you should be asking of the ceding scheme before deciding whether to transfer or not.    Luckily, many ceding schemes go for a double check at the transfer stage nowadays.

so I first checked all the documentation I could lay my hands on but found nothing.

Transitional relief was effective in 2006.  So, if your scheme pre-dates that then it wouldn't mention it.

They were unable to formally advise me whether I was safe to assume that a similar percentage of the pot was now tax free, but that was the impression given.

They are not advisers.  So, they won't risk giving advice.  It requires a calculation and the calculations vary depending on any other reliefs you have.

However at this point she had to go away and check this, and it seems that if I go into drawdown with L&G I also lose my rights, so I asked how I was able to keep these rights and actually make use of this protected tax free cash, and the answer was ... [drum roll please] ... to withdraw the entire pot in one lump sum!

It is technically a correct answer but not the only one. A bulk transfer (sometimes known as a buddy transfer or block transfer) would retain the protected tax free cash.    There may also be a flexible benefits crystallised funds transfer (used that twice this year with protected tax free cash along with a buddy transfer on another).  The scheme needs to support it but many do nowadays.

Hence given the pot's value is now ~110K, it seems I can increase my tax free element by ~4K

I make it £5676.80 additional TFC on top of the £27,500 standard TFC (assuming no other protections held)

Marcon

dunstonh said:

This was a surprise to me as I wasn't aware of this extra benefit 

It is one of the questions you should be asking of the ceding scheme before deciding whether to transfer or not.    

I agree in theory - but the problem for many people is that they don't know there is a question to ask, let alone what that question should be!