Bee-Mail - 28 September 2010

Protected pension lump sums 

If you ask most people what they know about pensions the general answer is something along the lines of "Not much!" If pushed most people might be able to say that some of the money put away in a pension comes back one day as a tax-free cash sum; tax-free cash (or Pension Commencement Lump Sum (PCLS) to give it its modern name now it's no longer a requirement to commence drawing a pension to get it (don't start me off)) is one of the sexiest bits of pension legislation and therefore comes up on everyday peoples' general knowledge radar levels. Pushed slightly further some people will even 'know' that the tax-free cash is 25%. (25% of what? is a bridge too far for nearly everyone, but knowing about 25% tax-free cash at retirement is a good start pension-knowledge wise.)

The so-called A-Day pension rules that came into effect back on 6 th April 2006 brought in a standard 25% to the PCLS for all types of pensions, but the rules also took into account that many pension savers had pre-A-Day tax-free cash rights of more than 25%. People in this position (and there were many of them) were given protection under the new rules. Basically they were still entitled to get the higher amount of tax-free cash they were previously entitled to. There was no need for people to apply for this particular protection as there was for other forms of protection on A-Day; it was given automatically as a right.

However, as with all things pensions this right came with a whole bunch of ifs and buts; even the red tape brought in to get rid of red tape came with its own red tape; you know the sort of thing. One big bit of that red tape says that people with protected pension lump sums only get the protection if they become entitled to all of their pensions on the same day. That's obviously easy if you've only got one pension, but Rubik's Cube level fiddly if you've got more than one.

The good news is that the tax people at Her Majesty's Revenue & Customs (HMRC) have just published a draft Treasury Order addressing this issue and paving the way for some useful simplifications that will make getting their protected lump sum rights a whole lot easier for people. We've attached a link here to all the gumpf on this in case it affects you or someone you know.

Who said pensions were boring? They must be mad...