Tax-free cash

Question 1

Money purchase and SSTFC

Answer 1

Normally, up to a maximum of 25% of the crystallised value of the pension fund/capital value can be paid as a tax free lump sum, capped at 25% of standard lifetime allowance (SLA). This 25% rule applies to all types of registered pension scheme (RPS) – including s32, PP’s, RAC’s and AVC’s (just to name a few – they are all RPS’s).

And this also applies to those over age 75 (this is covered in more detail in pension income options).

Transitional TFC rules protect members who had built up TFC rights above 25% under occupational pension schemes and s32 contracts before 6 April 2006. This transitional protection is commonly known as scheme specific tax free cash protection (SSTFC).

Question 2

Scheme specific tax-free cash key points:

Answer 2

• No need to register this SSTFC with HMRC; the trustees deal with it.
• The SSTFC protection is specific to the occupational pension scheme and transferring will normally lose the SSTFC, unless it is a buddy transfer (see further about buddy transfers)
• No phasing - the protection will be lost unless all retirement benefits under the scheme are crystallised at the same time
• Enhanced/Primary protection - scheme specific TFC protection doesn’t apply to those who registered TFC rights under enhanced protection or primary protection. That is, RTFC always takes precedence over SSTFC protection, but if no RTFC applies then SSTFC can be valid.
• Stand-alone lump sums where 100% of rights under the occupational pension scheme is deemed to be TFC; there are specific rules for this type of arrangement.

Question 3

Calculating SSTFC - what are the 4 steps?

Answer 3

1. The actual ££monetary figure of tax free lump sum under the scheme is protected: NOT the lump sum percentage (although it has to be >25% of the SFL @A-day TFC entitlement for SSTFC rules to apply from outset)
2. TFC value is increased in line with the growth in the lifetime allowance (LTA) between 6 April 2006 and the date that the benefits are taken. For all benefits taken on or after 6 April 2012, this increase should be calculated using an ‘underpinned’ LTA of £1.8M (the formula is shown later).
3. Extra tax free lump sum rights can be generated depending on fund growth (or benefit increases or transfers) between 6 April 2006 and the date that the benefits are taken.
4. Any additional tax free lump sum amount under this second part of the calculation is calculated as 25% of: The value of the total fund at date calculated less the fund value of benefits at 5 April 2006, increased in line with the growth in the Standard LTA to the date that benefits are taken. This will now be one of 5 possibilities:
   
   1. £1.0M/£1.5M (no transitional LTA protection)
   2. £1.8M/£1.5M (with FP12)
   3. £1.5/£1.5M (with FP14)
   4. £1.25M/£1.5M (FP16)
   5. £SpecificM/£1.5M (IP14 or IP16)

Question 4

SSTFC - Block transfers

What counts as a block transfer?

Answer 4

1. Two or more members transfer all rights to the same single receiving scheme at the same time (as long as they haven’t been members of the receiving scheme for > 12 months).
2. A transfer representing the member’s total rights under the scheme is made to a S32 buy-out contract as part of the winding up of a registered pension scheme (can be done for individuals).
3. Total rights under the scheme are assigned to the member as part of a winding up