Ask the experts: A-Day for pensions

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What do you have to do before A-Day, the date of pensions simplification? John Whiting, president of the Chartered Institute of Taxation and Andy Bell, actuary and managing director of Sippdeal, answer your questions.

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I want to invest in a collective investment scheme which will invest in residential property, as an investor I will have no day-to-day management of it and gain no benefit other than the income and capital gain. There will be over 200 investors and it will be run by an established a independent property asset management company. Can I invest in this via my SIPP and pay no tax on the income?
Richard Klin

John Whiting: No doubt you saw the announcement last week that there will be rules preventing a SIPP investing in residential property from “A day”. Strictly, it’s not a prohibition on investing in residential property but the legislation will be designed to remove all tax advantages from holding such assets by recouping 40% income tax relief and probably a 15% “scheme sanction charge” on such investments.

The rules will apply to direct investment by the SIPP, i.e. when the SIPP owns the property. The announcement from HMRC says the rules will apply to “indirect investment” such as when the SIPP owns a company which in turn owns the residential property. However, the announcement does say that “ the Government is minded to allow” SIPPs to invest in “genuinely diverse commercial vehicles … such as the proposed Real Estate Investment Trusts”. Your suggestion of a sort of investment club run by management company might pass muster under this but the honest answer is we can’t be certain until we’ve seen legislation. What you describe wouldn’t could as a REIT as it wouldn’t be quoted but we’ll have to wait and see when we get the fine print.

Andy Bell: Gordon Brown made it clear that he did not want to prevent such investments, as long as the investment is “a genuinely diverse commercial vehicle”. The scheme you describe would appear to satisfy this criteria although we will need to await draft legislation to see where the government draw the line in the sand.


If you are a pensioner from a company scheme and the pension is over £75,000 pa do you need to seek protection?
James Thom

John Whiting: The short answer is no – if you are already in receipt of a pension, you have crystallised your entitlement and there is no need to seek protection.

If, though, somebody was looking at a potential entitlement of £75,000 from an in-house scheme then the valuation of such rights would normally be on a ratio of 20:1 and thus the deemed fund would be over £1.5m and so “protection” might well be appropriate.

The other case when you might need to register for protection is if you have some unvested rights in other schemes. Then you’d need to value this pension-in-payment at A day at 25x.

Andy Bell: Protection is only needed if you have any “unvested” pension benefits that will “vest” after 6/4/06 or you (or your employer on your behalf) intend to make any further pension contributions after this date.

As a point of interest, pensions in payment at A-Day are valued at 25 times the pension amount at the first benefit vesting after A-day.

So, if you have a pension in payment of £60,000 pa and an unvested pension pot of £100,000 which you vest in 2006/07 then the legislation effectively means that you have a deemed vesting (immediately before vesting your £100,000 pension pot) of £60,000 x 25 = £1.5m which uses up all of your lifetime allowance. When you then vest the £100,000 pension pot, this is in excess of the lifetime allowance (ie as you have used up all of your lifetime allowance) and hence the £100,000 is subject to tax at 25% if you want a higher taxable pension or 55 per cent if you want a lump sum. In such circumstances, protection would be very important.

You will of course have three years after A-Day to apply for protection (but you cannot apply for enhanced protection if any contributions are paid on your behalf after A-Day.)


The contracted out element of my occupational pension is transferred to Scottish Equitable. Will it be possible to transfer this into my current SIPP arrangement?
Garth Allison

Andy Bell: Probably not at the moment, but check with your SIPP provider as some SIPPs do claim to accept protected rights. In practice, this is normally a separate appropriate personal pension contract running alongside the SIPP although may be set up under SIPP rules but with a restriction that the SIPP can only invest in cash or gilts (which then satisfies the DWP’s requirements). In practice however, it is generally accepted that SIPPs do not accept protected rights.

The Department of Work and Pensions (DWP) has been approached by the SIPP industry to see if they would reconsider whether SIPPs could be allowed to hold protected rights. This dialogue is ongoing, although is unlikely to reach a conclusion before 6th April 2007. This is the date from which SIPPs are due to become regulated by the Financial Services Authority (FSA). Ironically, last week’s u-turn by the Chancellor on residential property and other esoteric assets may actually help our cause in relation to allowing protected rights within SIPPs.


I am 73 next birthday. My SIPP plus section 226 policies exceeds the Lifetime Allowance. I presume Enhanced Protection is the only exemption worth claiming, as primary protection is very limiting. Should I claim as soon as possible? Can I forget about any ‘testing’ thereafter? What are the pros and cons of raising as much money as possible to add to my SIPP before A-day so as to ‘enhance’ it as much as possible? Can I relate back to previous years’ income to claim 40 per cent off any further money contributed, and if so to what extent?
Norman Freethy

John Whiting: The basic point of enhanced protection is that it’s a “elect and forget about it” type of election. Once you’ve made it, the option means that you will not be subject to the lifetime allowance charge at the time you take the benefits, providing you do not make any further contributions after 5 April 2006. If you do make any further contributions after that time, enhanced protection is forfeited.

Enhanced protection is available regardless of the value of your pension fund at 6 April 2006, i.e. you can in fact opt for it even if your funds are below £1.5m as well as above.

Andy Bell: You raise a lot of questions!

Enhanced protection is certainly the most popular and relevant in your position. There is however unlikely to be any downside in you also applying for primary protection, which would enable you to make contributions post A-Day in the event of a stock market crash, say.

Claiming before A-Day is unlikely to be possible or practicable. Timing is only an issue if you intend to take benefits, otherwise you have three years (well two and a bit in your case) to apply if you do not intend commencing [any further]benefits before age 75.

If you apply for enhanced protection, you don’t have to worry about any further testing e.g. the much maligned second benefit crystallisation that applies when individuals move from unsecured pension to alternatively secured pension at age 75. As a matter of interest, even if you have enhanced protection, the scheme administrator still has to monitor how much lifetime allowance is used at each vesting - it is just that you are exempt from any tax charge that may arise on funds in excess of the lifetime allowance.

You really need to speak to a financial adviser re the pros and cons of paying further contributions pre A-Day. This to my mind would stand or fall on your take on the attractiveness of the alternatively secured pension (ASP) rules and may also be influenced by the tax treatment of such funds on your death. This issue is still subject to clarification as part of the recent review on inheritance tax and pension schemes. My instinct is that ASP will not be a particularly tax efficient way by which to pass personal funds you currently own down to the next generation.

Carry back of contributions disappears on 31/1/06 for personal pensions (there is some further transitional protection for retirement annuities that lasts until 31/1/07). Carry forward is no longer available for personal pension schemes, but is available until A-Day for retirement annuities. Unfortunately time does not permit me to explain these in any detail, but you adviser will be able to help.


Now the u-turn on residential property investment has been made to prevent abuse, is it now still necessary for the chancellor to implement his restricted borrowing rules which are damaging to SMEs looking to buy commercial property through pension?
Gary Quinn, Crewe

Andy Bell: We have previously received correspondence from the Treasury confirming that one of the main reasons for the new (and more restrictive) borrowing rules was to act as a “brake on demand” for residential property. We will be making representations to the Treasury with a view to discussing both the borrowing position post A-day and also to see if it would be possible to reintroduce direct ownership of residential property by SIPPs in a more controlled form i.e. by eliminating member usage of such assets.


My employer is refusing to allow early retirement from my defined benefit pension. I have heard that short term annuities will be available after A-Day. Will I be able to use the total amount of my FSAVCs and SIPPs to provide for early retirement by filling in the gap between retiring and being able to take my company pension, and what is the likely income from a short term annuity of value £50,000 over five years. (say aged 60, spouse included)
Stephen Keeble, Suffolk

Andy Bell: I don’t think you will be able to achieve what you want to achieve. For example, you won’t be able to exhaust all of your FSAVC or SIPP pots over a say, five year period this then allowing your defined benefit scheme to kick in at then end of that period.

Short term annuities are really designed to work in conjunction with unsecured pension and are still subject to the unsecured pension limits. There has been very little interest shown in the market for short term annuities and I am not sure many schemes will offer them.

Example annuity rates can be obtained from the FSA website at www.fsa.gov.uk


Having read the article on page 3 of the Pensions A-Day Guide in FT Money of 26/27 November, what are the mechanics of electing for either primary or enhanced protection? Does the revenue issue a form of some kind or is it handled by the insurance companies?

I understand that if you have several policies (Section 226 type in my case initiated in the late 1960’s and early 1970’s), some of which have been crystallised and the remainder not, the imputed capital value of those already activated is 25 times the current pension. This puts me well over the cap so action is required.
Peter Minchin

Andy Bell: Application for either enhanced or primary protection is a matter for individuals. It is not scheme specific and hence it is unlikely that insurance companies will be accepting the responsibility for completing the relevant forms. This is more likely to be a matter dealt with by your financial adviser. Draft forms are currently available on the HMRC website and you will need the help of your various scheme administrators, particularly if benefits are in occupational (rather than personal pension) schemes.

You have three years to apply for either enhanced or primary protection. You will need a valuation of all pension arrangements and the amount of tax free cash entitlement at A-Day. There are limits as to how much can be protected if you have occupational pension scheme benefits.

Your point on pre A-Day pensions being valued at 25 x pension is correct (although for income withdrawal schemes i.e. personal pensions in income drawdown) it is the maximum pension as specified by the Government Actuary’s Department (GAD) that is the relevant figure (not the amount being drawn). This can lead to an effective doubling of the fund (see example below).

Male age 60, with a personal pension fund in income drawdown worth £400,000. Maximum GAD pension is £32,000.

25 x £32,000 = £800,000 (for the purposes of the lifetime allowance in the new regime) i.e. a doubling up from £400,000 to £800,000! This means that many in personal pension income drawdown will be blissfully unaware that they are far closer to the lifetime allowance than they realise.

John Whiting: There is a form on which you can elect for protection – see the HMRC website. It’s worth having a look at the guidance material – see www.HMRC.gov.uk/manual/rpsmmanual/


After A-Day will it be possible for a person (over 50) to pay into a SIPP every month and take out all or some of their monthly contribution in cash, thus effectively getting a handout from the Inland Revenue every month?
Rob Wishart

Andy Bell: This is very close to what is called “recycling” of tax free lump sums and this was attacked by the chancellor in his PBR last week. This device, as the government call the valid usage of their own silly rules, works by the scheme member withdrawing a tax free lump sum which is reinvested back into a registered pension scheme, automatically generating further tax relief on the amount reinvested. This in turn allows a further tax free lump sum to be paid out, so that the cycle can be repeated.

To prevent individuals from artificially boosting their pension funds by recycling tax free lump sums in this way an anti-avoidance rule will be inserted into the new pension tax simplification legislation, to take effect from 6 April 2006. The legislation will target cases where lump sums are taken with the sole or main purpose of reinvesting them in a pension scheme to create additional pensions savings through the additional tax relief granted.

I am not sure I would fancy the task of drafting or probably more importantly enforcing this legislation! So, in answer to your question, the government does not want you to do this, they will introduce legislation to prevent you doing this, but in practice whether you can or not will depend upon the effectiveness of the legislation they introduce.

John Whiting: This sounds a bit like ‘recycling’. This is something that the government announced last week they would legislate to block. By that they mean the idea that you could put 100 into a pension fund, take 25 as a tax-free lump sum, invest that, take another (smaller) lump sum, invest that and so on down. The legislation would block the idea if the sole or main purpose was recycling. (Assuming you qualify age-wise.)

It may be that your idea won’t be caught but it will be a case of looking at the exact rules – and of course evaluating whether it makes sense from an investment point of view. What it won’t stop is drawing a pension whilst still making contributions from continuing earnings.


I have got several small ‘bits’ of pensions which together do not amount to much more than £6000. Under the new rules, I understand I am able to take these as a lump sum, however they are going to be taxable. Please explain why they should be. What was the point in my keeping these as a pension in order to get the tax benefit if the Chancellor is going to take it all off me? I might as well have took the sums at the time and invested them.
Pauline Taylor

Andy Bell: I am assuming that you have pension funds worth £6,000 (and not £6,000 pa pension in payment). Under the new rules, you may qualify for a “trivial commutation lump sum” which I believe is what you are referring to. You will need to be between age 60 and 75 for this to apply. All benefits will need to be taken within a 12 month window, commencing with the date when you first draw a trivial commutation lump sum. Total benefits cannot exceed 1 per cent of the lifetime allowance i.e. £15,000.

25 per cent of the trivial commutation lump sum will be payable tax free and the remaining 75 per cent will be taxed as earned income under PAYE. If you do not pay tax then you could in theory receive all of the payment tax free.

The principle of tax relief on contributions, tax free growth, a tax free lump sum on retirement and then a taxable pension has underpinned our pension system for many years and will continue to do so in the new regime. All the trivial commutation lump sum allows you to do is take what would otherwise be a very small income as a lump sum (under broadly consistent tax treatment).

John Whiting: The rationale is that any withdrawal of funds from a pension scheme, apart from the tax free lump sum, is taxable. Contributions to the pension scheme gained tax relief when they went in; such growth as there was in the scheme was tax free; the “balancing act” from the Government’s point of view is when the funds come out then they should be taxed. This is how our pensions rules work.

Overall you have gained, even though I sympathise with your view that small sums seem hardly worth taxing.


In preparation for A-Day, I have been researching providers of self-invested personal pensions (SIPPs) with a view to setting up a personal pension in addition to my current occupational scheme. A number of SIPP providers appear to be execution-only brokerage firms providing a SIPP wrapper for pension investments, and I am concerned how secure a SIPP fund would be in this case. I know it is standard practice for client funds to be kept in separate nominee accounts, thus protected from creditors should the brokerage firm or SIPP administrator go bankrupt. But what about the bank which holds the SIPP nominee account(s)? Would SIPP nominee accounts be protected from the bank’s creditors should the bank fail? This may sound overly cautious, but I’m old enough to remember Barings Bank.

Thanks for any reassurance you can give (or warning, as the case may be).
Rebecca K

Andy Bell: Any SIPP cash held in a bank account will receive the same protection, in the event of the bank defaulting, as other account holders with that bank. The regulatory regime has been reviewed and strengthened since Barings. Like stockbrokers and other investment institutions, Bank’s are now regulated and monitored by the Financial Services Authority (FSA). The FSA require all Bank’s to meet rigorous prudential standards, including maintaining adequate capital, in relation to their banking business, so that they can absorb losses without endangering customer deposits. They are also required to maintain an adequate level of liquidity and have processes in place to identify and control their largest risks.

In the unlikely event that a Bank does go bust, money held in a SIPP account should be covered by the Financial Services Compensation Scheme, which provides compensation for depositors of 100 per cent of the first £2,000 and 90 per cent of the next £33,000 of their deposit.


There is plenty of comment in the press about the need to protect pension funds over £1.5m. How does one go about this? What type of protections are there? Do you need to submit forms to apply and if so, where do I get them from?
Judith, London

John Whiting: There are two types of protection:

• Primary protection – if the value of your funds at A day exceeds the £1.5m lifetime allowance (LTA), consider applying for primary protection. This allows you to substitute the actual value of your funds at A Day for the £1.5m limit. You’ll then have a personal LTA which will then go up parallel to the general LTA. You are then allowed to make further contributions post-A day, aiming to keep in your LTA limit.

• Enhanced protection – this ensures that you wouldn’t be subject to the excess charge on funds greater than the £1.5m LTA. However, you are not allowed to make any further contributions.

The protection can also cover any entitlements to tax-free lump sums over £375,000 (i.e. 25 per cent of £1.5m).

You have until 5 April 2009 to register for protection. There is a form available on the HMRC website and it seems to allow you to opt for both protections and then rescind. It’s also worth having a look at the HMRC guidance manual – see http://www.hmrc.gov.uk/manuals/rpsmmanual/index.htm


I had decided to transfer two small pension funds to a SIPP. I have found that the SIPP that I selected does not accept a transfer in of Protected Rights. Both of the small pensions that I want to transfer have Protected Rights funds.

1. Is it a general rule that SIPPs cannot accept a transfer in of Protected Rights?

2. If I went ahead and transferred the two pensions, what would happen to the Protected Rights?
Rosemary M

Andy Bell: The Department of Work and Pensions (DWP) has been approached by the SIPP industry to see if they would reconsider whether SIPPs could be allowed to hold protected rights. This dialogue is ongoing, although is unlikely to reach a conclusion before 6th April 2007. This is the date from which SIPPs are due to become regulated by the Financial Services Authority (FSA). Ironically, last week’s u-turn by the Chancellor on residential property and other esoteric assets may actually help our cause in relation to allowing protected rights within SIPPs.

The options available to you for your protected rights will depend upon the type of scheme you have at the moment. It is quite possible that you will be able to leave your protected rights in your existing schemes, just transferring the non-protected rights into your SIPP.

If this option isn’t available to you e.g. as may be the case for certain contracted out company pension schemes, you should be able to transfer the protected rights into an appropriate personal pension (APP). An APP is a personal pension specifically designed to accept protected rights. This will again enable you to transfer the non-protected rights into your SIPP.


1. In the Teachers pension scheme which is an 80th scheme giving 1/80th for each year of service and 3/80th as a tax free lump sum, how do you work out how much additional tax free cash you will be allowed to take assuming the scheme rules allow it? Is it 25% of the value of the fund (20 x pension + tax free cash) or is there a more complex formula? The commutation rate that the Teachers Pension Scheme is talking about is 12-1 which of course is very poor.

2. Is there anything in the A day regulations to prevent a teacher with a substantial AVC, who retired last year but did not touch his AVC, waiting until after A day and taking 25% of the AVC as tax free cash?
Willie Young

Andy Bell: Tax free cash will be dictated by the scheme rules. As long as the tax free cash is within the maximum allowed under the new rules, then that is fine. The form of benefits from the TPS qualifies on this front, although clearly higher tax free cash could be paid.

Tax free cash cannot exceed 25% of the value of benefits from the TPS. The value of the benefits is equal to the tax free cash plus 20 x pension.

2. In theory nothing to prevent you doing this although I suspect that a rule change would be required to the AVC scheme.

You will need to speak to your scheme administrator on both of these points as it appears that it is their intentions, rather than the content of the new legislation, that is the key to you finding answers to your questions.

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