Fixed Protection Pension

[Tiger_mate]

A DIN has been published to inform members of the AFPS who are considering applying or who have applied for Fixed Protection that they must inform SPVA in writing of this decision by 31st March 2012.

Now I can see my pension in the near distance but not so close as to be in touch yet, and a fastball demand to fix it now or never when I have no idea what that means is a worry. Is anyone able to put in laymans language the consquence of letting this go by un-noticed?

Intranet guys may find that:

DIN 2012DIN01-080: Pension Tax Relief – Lifetime Allowance – Notification Date to SPVA.

..works. It is applicable to all in the military regardless of colour of uniform.

[Al R]

Tiger mate,

If you expect your pension savings to be more than £1.5 millions when you come to take your benefits on or after 6 April this year, you can ring-fence your 'pot' to reduce your taxation liability (from April, the lifetime allowance (LTA) for pensions will be reduced from £1.8 milions to £1.5 millions). The lifetime allowance is the total value of pensions which you can accumulate without incurring additional tax charges. If you are going to exceed this amount, you can however, apply for Fixed Protection (FP), meaning that your LTA would be fixed at £1.8 millions (and not the revised, lower amount).

People who could benefit from applying for FP are those relatively close to retirement, or anyone who believes the HMRC's value of their existing pension provision might exceed £1.5 millions at retirement. In real-life terms, primarily, but not exclusively, this is of interest to people at 2/3* level - especially those who might be about to start a second career in civvy street. Options? Negotiate a second career pay and remuneration package that considers alternatives and isn't so pension based?

You do not need to already have built up pension rights of more than £1.5 millions to apply but you should expect your pension pot contributions to cease if you do elect to apply for FP. The impact of failing to apply for FP? It could cost up to £75,000 in tax-free cash (especially if you have a second, larger Defined Contribution scheme) while a tax charge would also apply on any monies that exceed £1.5 millions.

HM Revenue & Customs: Fixed Protection for Pension Savings (http://www.hmrc.gov.uk/pensionschemes/lifetime-allowance/savings.htm#1)

That is all information - as ever, take personal advice that applies to you.

[Tiger_mate]

Thanks Al, that clears the waters a llittle.

Not being at *starry* heights I am assuming it to be irrelevent. By "pension savings"; is this the perceived total value assuming longevity of life?

ie I my pension is 35k pa and I live for retirement plus 10 years are my 'pension savings' 350k (35x10) or am I looking in the wrong direction?

I am yet to do the resettlement finance brief which may cover such things, and thus far have lived in blissfull ignorance based upon the fact that a PAS pension is better than Joe Average is ever going to get.

[YellowBelly]

Al R

Very interesting comments as always Al. However, I'm a bit confused about your statement:

"I hope you've considered using your other half's allowance too, for your retirement income! Capitalising on £9,205 of tax free income from a (usually - without stereotyping!) non working wife is often overlooked."

I was of the opinion that you can no longer transfer a spouse/partner's unused personal allowance to yourself. Or are you just recommending that investments such savings accounts are in your non-working spouse's name to make use of her (or his!) personal allowance?

Cheers, YB.

[Al R]

Certainly a non working partner should have savings in her name, and if appropriate, a Form R85 should be signed and given to the bank.

http://www.hmrc.gov.uk/forms/r85.pdf

A non working partner should consider having their own ISA of course, and personal pension to make best use of up to tax relief. For a non tax paying partner, £2,880 per annum may be contributed into a pension, made up by HMRC to £3,600 gross. A partner who works and makes, say, £10,000 per annum can save (with spousal help possibly) up to £10,000 gross (£8000 net).

One elegant solution would see someone getting max tax relief on the way 'in' to a pension plan and saving enough to be able to draw just under, or as close to the personal tax allowance on the way 'back'. So - as much tax uplift as you can from the state and £9200+ each year (in your partner's name) free of tax coming back at you both the other way.

[Melchett01]

The personal allowance increase to £9,205 is a massive leap too.

I haven't seen any figures yet, but I have seen a report that suggests that whilst the personal allowance went up to £9,205, the threshold for paying 40% tax went down by even more than the allowance went up and that the 40% tax band now starts at just £41,450.

If so, then I'm not sure exactly how much we will save. I would dearly love to know what this government considers the definition of weathy or rich actually is. Because the middle are yet again going to get hammered if this is the case. Oh to be a tycoon and have to be forced to pay a whole 20% rate of tax. :sad:

[Al R]

There are more and more higher rate tax payers being created each year - Labour started dropping the threshold to bring more and more people into it. On the plus side, that means more tax relief available to an increasing number of lower earners who want to make use it.

Soon, we'll all be affluent middle/upper class Higher Rate tax payers..

[Voxpop]

To calculate the capital value of your pension (in order to compare it to the Life Time Allowance) you multiply the pension by 20 and add the lump sum. Rule of thumb: if your pension is over £60K the LTA ceiling could affect you.

[Melchett01]

To calculate the capital value of your pension (in order to compare it to the Life Time Allowance) you multiply the pension by 20 and add the lump sum.

Thickie question warning - I assume the pension part is from the pension tables you get online? Only asking as a lot of the DINs talk about 'pension codes', the closest to which I can seem to find are the pension tables you get with the pay scales.

[Al R]

Its the pension that you will get each year and will be in the tables - also, tried www.mod.abc.co.uk? (http://www.mod.abc.co.uk?) . Bear in mind that even if you did declare Fixed Protection, you wouldn't be immediately financially advantaged because you wouldn't be paid anymore even if you did cap your AFPS 'pot'. Right now, its not so much of a problem, but once the pay freeze is lifted it'll be too late of course.

Doctors and Consultants are leaving the NHS final salary scheme in noticable numbers - something which has historically been financial planning heresy. If projected high earners/achievers did place the issue of retirement income above anything else, leaving prematurely at an AFPS 'sweet spot' and negotiating a non pensions biased contract with a civilian employer might be a modern possibility.

[late-joiner]

I retired in 2009 aged 54 on Afps05 with 36 years service. Currently being paid an EDP. Trying to get my head around LTA which when I retired was not a consideration (at £1.75m) but now with a post retirement SIPP and LTA reduction most definitely is.

My question is whether a benefits crystallisation event took place when EDP started being paid which somehow used up part of the LTA, or is the calculation done afresh at age 65 when mil pension comes into payment and second lump sum received?

Although I might need paid for advice, there might be a general point here the specialists can answer?

[Al R]

Last three '700' refers.

RPSM11104000 - Technical Pages: Lifetime allowance: Valuing benefits on BCEs: contents (http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM11104000.htm)

Follow the link through to 'Payment of a relevant lump sum (BCE 6)', then: RPSM11104710 'Lump sums covered (a relevant lump sum)'.

The Lib Dems want to reduce the Lifetime Allowance even further to £1,000,000.. at which point Wing Commanders need to be worried. Without restricting it exclusively to those with suitable seniority, but anyone currently at Group Captain level should be taking a view on this, to the extent of considering negotiating a post mil civilian contract without the superficially attractive pension contributions and something else instead.

Even if the Lifetime Allowance wasn't reduced, it's still easy for the government to revalue a public sector pension, as it did a few years back.

[late-joiner]

Thanks for the reply. I thought I was able to read and understand most financial/taxation stuff, but that quickly lost me. Too many words with I suspect specific meanings I do not know.

A forecast I got before the final letter awarding the EDP says I have used 57% of my (1.75m) LTA. So I guess I have triggered and used it, which is probably good, because I was concerned that I might have to apply 11 years of inflation increases before working out how the second lump sum features in the calculation.

[Voxpop]

The pension is valued against the LTA at the time it is drawn, so CPI increases between the date you left with a preserved pension and the date it comes into payment will be taken into account.

[Al R]

LJ,

It is mind numbing; you mentioned a SIPP. After its third thematic review, the regulator is issuing fresh guidance this week about restrictions on what may and may not be invested in those, and capital adequacy requirements of providers. Plus ca change.

[late-joiner]

I am sorry if I am being thick, but I am not clear. Which of the four numbers below gets counted in calculating how much of LTA has been used?
1 - annual EDP
2 - first lump sum paid at start of EDP
3 - pension at age 65 (presumably at inflated value?)
4 - second lump sum (presumably at inflated value?)

There must be hundreds in my sort of situation, so I think my question is still generic rather than personal.

[Al R]

None of those dictate the LTA. The LTA is what it is, the amount of wealth that is attributed or earmarked to you if in an unfunded scheme like AFPS, or however much you have within your SIPP (and that will change daily).

Then (and everyone's will be different), and however you draw that wealth whether EDP, PCLS from your SIPP, annual income etc.. all will be benchmarked against your LTA.

So, none of the 4 in your list get used to determine your LTA. Rather, what your LTA is (voxpop posted a summary of that) determines how much money (from those 4) that you are entitled to, or can draw.

[late-joiner]

I appreciate that those 4 number do not determine the LTA, what I was asking was that given those four numbers, as they all form part of the same afps05 package, how much of the LTA would they have used up, say at age 65?

I think from the answers you have both given and what I have read that the answer is:
(20 x [3])+ [4]
ie, 20 times pension at 65 plus lump sum at 65, both at inflated values

or is it more than that?

[Willard Whyte]

Sorry for thread hijack/drift!

Currently drawing my mil pension: ~£13K jumping to ~£18K (+ 9 years worth of CPI inflation) in a few years when I hit 55 (commuted full amount when I left).

I'm Working for a company that currently provides a final salary pension, also topping up this fs pension with voluntary payments.

From HM R&C (http://www.hmrc.gov.uk/pensionschemes/understanding-la.htm#1) do I simply add my (predicted) RAF pension (in say 15 yrs time when I intend retiring) to my expected pension from my current employment, again in 15 years time, to get a final combined annual pension which should, if it doesn't exceed the figures at the link (£62,500 pa if you don't take a lump sum, £46,875 pa if you take the 25 per cent maximum tax free lump sum), and all other things being equal, not exceed the LTA?

Is there a formula for how much a mil pension is worth in terms of LTA, and if applicable does this amount reduce as the mil pension is drawn? Does the lump sum I took when I left the mil have to be factored in?

Finally will the state pension, assuming it isn't means tested by then, affect the LTA too?

I'm rather concerned that at today's rates the total of my two pensions will be very close to the ~47K, admittedly I nice position to be in, particularly if I continue to keep up my current level of voluntary pension contributions, and that a state pension will certainly take me over the threshold.

[Voxpop]

When you took your pension it was 'crystallised' and that is the point at which the test against the LTA is done. If you have any concerns about what I say, speak to Al.

[Voxpop]

The EDP is not part of the pension scheme so does not count against the LTA. What is counted is the preserved pension and preserved lump sum (plus CPI increases).

[late-joiner]

Voxpop,

Thank you. That is clear.

Not a question, but a comment, I do wonder quite what the EDP is sometimes. In many ways it looks like a pension. It goes on my tax return in the space for a pension. Like a pension it is only subject to income tax not NI. It is not earnings so I cannot make further pension contributions from it and the documents I occasionaly get from xafinity (now equiniti) seem to refer to it as a pension.

[Al R]

LJ,

For the past 3 months or so I have been batting this about with HMRC, trying to get one or two definitive answers about the EDP (scary how many 'definitive' answers you can get). The detail that is promulgated isn't exhaustive. Dealing with HMRC though, is.

WW,

I have some useful detail for you, I will post it later.

[Just This Once...]

The whole EDP vexes me. Seemingly introduced as a 'payment' rather than 'pension' to get around the revised minimum age rules for drawing a pension, but (so far) HMRC seems to treat it exactly the same as the AFPS75 pension.

I hope they do not suddenly change their minds.

[just another jocky]

I do wonder quite what the EDP is sometimes. In many ways it looks like a pension. It goes on my tax return in the space for a pension. Like a pension it is only subject to income tax...

EDP is taxable? I thought it was a tax-free lump sum. :confused:

[Al R]

EDP:

The Mortgage Market Review (MMR) which the FCA has just pronounced upon is going to make the role of the EDP even more important. It comes into force on 26 April and one of the aspects which might affect some here is that mortgage holders can borrow on an interest-only basis as long as there is a credible repayment strategy.

The attitude of the banks towards the EDP is inconsistent. Lloyds only helped out with someone here because the current head of consume lending policy once happened to work in the temporary Lloyds Bank at Chater Road (RAF Wittering). I have asked Forpen if it could coral its administrative might and try to fuse a common lending approach to the EDP but I heard nothing back.

HMRC's attitude towards it is equally variable. I spend about 2 hours a week chatting with the dept in Liverpool which has the say. Part 2 Chapter 5 of the Finance Act 2005 differentiates between redundancy payments and contractual payments - HMRC accepts that it isn't a pension payment (which it isn't of course) but is happy to pass the decision to the various pension companies. Who can go around like headless chickens - the banks look on it as one, for instance.

This is important because if it counts as 'relevant earnings', it can count towards receiving tax relief for a pension contribution - important if a Higher Rate tax payer has limited need for capital and liquidity with his/her EDP and wants a last hurrah force multiplying bang per buck as a wage earner. It isn't for everyone, take advice etc, but for someone with a career profile cruising horizontally the annual pension contributions are notionally modest, so, making use of the previous 3 years unused annual contributions, an uplift can run into the £ tens of thousands.

[late-joiner]

EDP is taxable? I thought it was a tax-free lump sum. :confused:

The lump sum is tax free

The monthly EDP payment is taxed, but no NI is paid on it

[Willard Whyte]

Al R, many thanks for the information. As I mentioned I hope/expect to retire from my current job in ~15 years, although much will depend on pension calculations - could be before then, could be after!

At least I have a few years to get my figures in order.

I note that Echelon Wealthcare describes itself as 'Specialist Independent Financial Advisers for HM Forces', would your / its services be available to a retiree such as myself? I feel I probably need to continue this discussion, outside the bounds of this forum, at some point in the (near-ish) future!

[Al R]

As an 85 year old, I would feel compelled to rule out long term planning for you of course. ;-)

Always happy to help.

[Voxpop]

The 2004 Finance Act put paid to pensions before age 55 so AFPS 05 ( which would the the scheme for new entrants going forward) could not be designed with an Immediate Pension. However, MOD needed something to pull people through to about age 40 and to compensate them as most people do not get to serve to 55. Thus the EDP was born and is part of a completely separate scheme.

[late-joiner]

EDP:


HMRC's attitude towards it is equally variable. I spend about 2 hours a week chatting with the dept in Liverpool which has the say. Part 2 Chapter 5 of the Finance Act 2005 differentiates between redundancy payments and contractual payments - HMRC accepts that it isn't a pension payment (which it isn't of course) but is happy to pass the decision to the various pension companies. Who can go around like headless chickens - the banks look on it as one, for instance.

This is important because if it counts as 'relevant earnings', it can count towards receiving tax relief for a pension contribution - important if a Higher Rate tax payer has limited need for capital and liquidity with his/her EDP and wants a last hurrah force multiplying bang per buck as a wage earner. It isn't for everyone, take advice etc, but for someone with a career profile cruising horizontally the annual pension contributions are notionally modest, so, making use of the previous 3 years unused annual contributions, an uplift can run into the £ tens of thousands.

Al R, with only a few days left of this tax year, I wondered whether it was any clearer whether EDP counts as relevant earnings from the perspective of making a pension contribution?

[fabs]

Another potential dumb question/comment warning. My wife (Consultant Surgeon) has been advised that fixed protection means she will have to stop contributing to her pension (sorry if that is over simplifying, I don't really understand it). She's basically been told to standby for some 'individual protection' rule making its way through parliament at the moment. Is this ok advice do you think?

[Al R]

fabs,

It isn't a dumb question at all. Individual Protection, as we know it, has been around for a while. It will be rolled out again, when/if the lifetime allowance drops further. If your wife hasn't considered and/or taken out fixed protection, she has not long at all to make her mind up - pretty unrealistic now to be objective - given the consequences of getting it wrong.

One aspect though of planning in an abstract sense and being purely contingent in a theoretical sense, is that if she (forgive me!) divorces you and if there is a pension debit order made against her 'pot', her allowance resets. If she has a pension in existence already in this tax year, she can retrospectively refer to it and top up an unused annual allowance if she wanted to get her retirement saving back on track.

But.. make sure she takes proper regulated advice about this. The consequences of getting it wrong could be in the order of tens of thousands of pounds.

LJ,

Sorry, my file was growing nicely and then the budget impacted with end of year stuff. The devil is in the detail - that's the bottom line. You can use it if you use it taking into account other rules and guidance. Recycling guidance wasn't devised to trap the unwary, just the unscrupulous. In HMRC’s words, there must be ‘a conscious decision’ and the onus is on HMRC to prove a pre-planned intent to recycle. But guidance exists to help you too, and as long as you play within the rules, you should be ok.

There are lots of relatively simple, straightforward and legitimate ways you can increase the levels of contributions into a personal pension following receipt of EDP/PCLS(tax free cash from a pension). They have to be done diligently and taking into account guidance (see below). If you are clumsy, unsubtle and inarticulate about it, and that isn't a metaphor for encouraging weasely deceit, then expect the sound of outraged HMRC Omegas on gravel at 0230.

However, if you have a plan in place that is thoughtfully considered and well documented, if you are diligent, law abiding and acquiescent enough to accept that the rules are fair and exist to help and protect, you should have nothing to worry about - if your contributions increase after taking a PCLS/EDP. After the budget, it is now even more consistent with GO's declared modern principles of a flexible approach to pension saving and retirement.

However, for the avoidance of doubt and for peace of mind, always take personal and regulated advice that you trust, and this is chapter and verse on recycling. Bear in mind too, that as part of growing your retirement income, if you want to subsequently refer to a year's unused pension allowance, you have to have a pension established in that tax year. It might be that you set one up with a small payment - but you'll have at least done it.

I'm acutely aware of not stepping over the line into offering advice so I offer that as generic, non specific information. Sorry for being opaque and I sense you have one eye on the calendar. Message me and I can probably help you a little more. I'm working this weekend and my number can be found indirectly elsewhere in this thread.

RPSM04104900 - Technical Pages: Taxation: Unauthorised Payments: Recycling of pension commencement lump sums: Contents (http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm04104900.htm)

[late-joiner]

Al R, PM Sent

[AV8tour]

Al - superb posts as always!

Learned a lot from this particular LTA discussion but still not sure of how AFPS 05 LTA % used calculations are done by Xafinity and now EQUINITI ( not the preserved pension x 20 + .tax free lump sum ..bit, but how they derive the "% LTA used" figure).

Having retired after 25 yrs, OF5, AFPS 75 transition to 05 , I have received EDP statements since 2008 stating my Standard LTA used = 91.32%. This figure has not changed even though the value for LTA has been chipped away from £1.8M down to £1.25M. Surely a LTA USED % figure would change as the LTA figure was varied? I phoned them for clarification a year or so ago when the protection debate heated up and they wrote back confirming that the LTA I have used is 91.32% and this is what is in their records.

Apart from in not changing with a reducing LTA (not complaining) but this seems far too high a % figure for an OF5 retiree- salary and therefore pension ain't anywhere near 2* levels - isn't it at * rank when LTA maxing out is an issue?

91.32% is too close to LTA allowance allowed before tax when receiving second career pension contributions from generous employer - a point you have stressed to forum many times.

Question : is this 91.32% a figure realistic for "LTA used" after 24 yrs service, finish as OF5, AFPS 05? Seems too high.
Thanks Al