Lump Sum Recycling
As most of you will be aware, new rules come in to play in April 2015 in relation to the annual allowance in retirement brought in under the pension freedoms scheme. There are fears though that people may look to recycle pension cash back into their pension scheme.
Under new rules outlined earlier this year, an annual allowance of £10,000, known as the money purchase annual allowance, will be triggered whenever someone goes into flexi-drawdown or takes an uncrystallised fund pension lump sum.
However it is often possible for people with old money purchase occupational schemes to take what is called a ‘standalone’ lump sum, which can be of substantial size.
At a recent forum, HMRC did clarify that a ‘standalone’ lump sum would not trigger the money purchase annual allowance except where the member has primary protection as well.
Primary protection was available to anyone whose pension funds on 5 April 2006 were at or above the annual allowance of £1.5 million brought in that year. Enhanced protection, available until 5 April 2009, had the effect of eliminating and lifetime allowance charge in return for surrendering certain rights.
The reason a standalone lump sum with primary protection would trigger the money purchase annual allowance is because with primary protection the protected tax free cash is given as a monetary amount. That means you could choose to take all your cash from one scheme, whereas with enhanced the tax free cash element is given as a percentage of each amount you crystallise.
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