Fixed Protection

If you expect the sum of your pension arrangements to be worth more than £1.5 million when you come to take your benefits, on or after 6 April 2012, you can use Fixed Protection to protect them from the lifetime allowance charge. If you do not have either ‘Primary Protection’ or ‘Enhanced Protection’ (which you would have needed to apply for prior to April 2009) you can apply for Fixed Protection. You do not need to already have built up pension rights of more than £1.5m to apply. The Lifetime Allowance (the maximum level of pensions saving allowable without tax penalties) is reducing to £1.5 million from 5 April 2012. If you have Fixed Protection your lifetime allowance will be fixed at £1.8 million rather than the standard lifetime allowance of £1.5 million (from 5 April 2012). Your Fixed Protection will become redundant if and when the standard lifetime allowance rises to be more than £1.8 million in the future.

The disadvantage to registering for Fixed Protection is that you will need to stop building up benefits (by way of making contributions) under every registered pension scheme that you belong to by 5 April 2012.

We strongly recommend that you seek advice from your Financial Adviser regarding whether registering for Fixed Protection would be of benefit to you, given you personal financial circumstances. If you wish to register for Fixed Protection, SSAS Practitioner.com Limited can do this for you as part of our fully inclusive annual fee. The registration needs to be completed by 5 April 2012. After this date the opportunity to register will be lost.

When HMRC have received and processed the registration, they will send you a certificate to state that you have Fixed Protection. You will lose Fixed Protection if you:

1) Start a new arrangement other than to accept a transfer of an existing pension plan

2) Have benefit accrual (ie make contributions)

3) Break HMRC restrictions regarding where and how you transfer benefits (SSAS Practitioner.com Limited will advise you regarding these restrictions where necessary)

If you lose Fixed Protection then you will revert to the standard Lifetime Allowance. Therefore, if the sum your pension arrangements are worth more than £1.5m, and Fixed Protection were lost, there would be a tax charge on the excess.

Transfers between registered pensions can still take place if you are registered for Fixed Protection.

In summary, clients are only likely to need Fixed Protection if they feel that benefits from all registered pension schemes will be more than £1.5 million when benefits are taken. We strongly recommend that clients discuss this with their Professional Adviser at the earliest possible opportunity given the 5 April 2012 deadline for registration. Clients who do not have a Professional Adviser can contact us. Any clients wishing to register for Fixed Protection must advise SSAS Practitioner.com Limited in writing. We will then effect this registration on clients’ behalf as part of our annual fully-inclusive flat fee of £800 + VAT.

New Drawdown Rules & Changes to Death Payments from April 2011

The government has announced a number of important changes to the rules for converting pension funds into income. From 6 April 2011, there will be new rules for pension drawdown. These will give SSAS members more flexibility and control over their pension options when they retire, and will provide the opportunity to defer taking a pension plus tax-free cash beyond age 75.

From 6th April 2011, SSAS Members will have the option of continuing normal drawdown and potentially taking tax free cash beyond age 75. This will be known as ‘Capped Drawdown’. A new option of ‘Flexible Drawdown’, subject to maintaining a secure income of £20,000 p.a., will also be available from 6th April 2011, allowing members to draw as much income as they choose from their SSAS. In both types of drawdown, the income taken is of course subject to income tax at the member’s marginal rate.

Capped Drawdown - Capped drawdown is an option to draw an income for life from the SSAS, within an annual limit, without having to purchase an annuity. It is similar to drawdown under the current rules in that it can start at any time from age 55, but can now continue beyond age 75. Those who are currently in drawdown via an alternatively secured pension (ASP; the current drawdown option for those over age 75) will automatically be converted into Capped drawdown after April 2011.

The tax rate on lump sum death payouts is currently 35% for death prior to age 75, and 82% for those drawing an ASP; under Capped drawdown, a single tax rate of 55% will apply, irrespective of age. There will continue to be no tax on pension funds where death occurs before age 75 and no benefits have been taken, or on sums left to charity.
Capped drawdown allows a pension to be paid up to a maximum amount every year. The new maximum will be set at 100% of the GAD (Government Actuary Department) rates, compared with the current maximum of 120%, so there will be a reduction in the maximum amount payable. The maximum income limits will be reviewed every 3 years before age 75 (this is currently every 5 years) and annually after age 75. Under the current rules, there is no minimum requirement to the income that can be drawn under age 75, and that remains the case. However, in future there will also be no minimum income requirement after age 75, substantially enhancing the flexibility of drawdown for the over 75s.

Flexible Drawdown - Those with secure incomes from elsewhere of over £20,000 p.a. will have no limit on the income they can take from their SSAS via drawdown. Like Capped drawdown, Flexible drawdown can start at anytime from age 55, and a single tax rate of 55% will apply upon death, irrespective of age. There will continue to be no tax on pension funds where death occurs before age 75 and no benefits have been taken, or on sums left to charity.
Flexible drawdown is an option that will give those with large funds more flexibility than everyone else. The £20,000 income required to satisfy the new minimum income requirement (MIR) can include the basic state pension, additional state pension, level annuity income and Scheme Pensions. The latter are available from a SSAS via SSAS Practitioner.com. The lump sum required to purchase an annuity sufficient to satisfy the MIR, assuming the full state pension is also payable, will be about £200,000 under prevailing annuity rates.
SSAS members considering Flexible drawdown should bear in mind that transferring a large amount of money from their pension fund into their estate, possibly at a top tax rate of 50%, might not make a lot of financial sense. Leaving it in a tax-exempt SSAS, taking annual pension withdrawals at maybe a lower rate of tax and having a 55% tax rate (but no IHT) on any residual lump sum upon death may be more attractive. SSAS members should seek financial advice before deciding upon Flexible drawdown. Those who are considering Flexible drawdown may be put off by the idea of buying an annuity to cover their minimum secure income requirement, maybe costing £200,000 or more. Fortunately, Scheme Pension (a form of income drawdown similar to an annuity) counts as secure income. Scheme Pension can be set-up for a SSAS member by SSAS Practitioner.com. Scheme Pension creates a situation where flexible drawdown is available without having to buy an annuity. Only a handful of providers (ourselves included) currently provide Scheme Pensions under SSASs, but we can see this becoming a more popular option, particularly with those SSAS members who are opposed to annuity purchase.

Conclusions - These new rules, with the exception of the increased tax on death under age 75, will benefit those who do not want to buy an annuity by age 75 or who want more flexibility and control over their pension. They also mean that investors will be able to commit long term savings to a pension, knowing that they will be able to retain control over that money right up to the day they die.
Unlike many pension providers SSAS Practitioner.com anticipate being able to provide Capped and Flexible drawdown via our SSASs from 6th April 2011. Our website and associated literature will be fully updated by then to provide our clients with as much information regarding the new rules as possible. We will also have updated administrative systems in place to ensure that our clients benefit from the increased flexibility and large potential tax savings these new rules will bring.