Pensions
Last Updated: 30 Apr 24 10 min read
Scheme Specific Protected Tax Free Cash (SSPTFC) is available to some people who had entitlement to tax free cash (TFC) from their scheme in excess of 25% as at the 5th April 2006.
1. Key Points
2. What is Scheme Specific Protected Tax Free Cash?
The maximum TFC allowable after 5th April 2006 was 25% of the fund.
However, some occupational scheme members had pre-6 April 2006 rights greater than the 25% limit. SSPTFC enabled the pre 6th April 2006 tax free cash to be preserved.
See Paragraphs 31-34 Schedule 36 Finance Act 2004
This TFC protection extended to:
There is no similar TFC protection for retirement annuity contracts, (RACs) even though pre 6th April 2006 TFC entitlement could have been greater than 25% under the old 'three times residual annuity' basis. These contracts moved to a straight 25% calculation basis after 5 April 2006.
SSPTFC doesn’t apply to someone who has claimed primary or enhanced protection and has their pre 6 April 2006 tax free cash protected as it exceeded £375,000. If the lump sum is protected through primary or enhanced protection, this takes precedence over scheme specific protection.
However, an individual with enhanced or primary protection can be eligible for scheme specific TFC protection, as their tax free cash rights at 5 April 2006 didn’t exceed £375,000, but they did exceed 25%.
Unlike other forms of protection, there was no need to apply for scheme specific tax-free cash protection.
Paragraph 25(5)(a) Schedule 36Finance Act 2004
For scheme specific protection to apply, all these conditions must be met:
The formula for SSPTFC has changed over the years. It used to be based on changes in the lifetime allowance between 6 April 2006 and when benefits were taken.
Broadly, the amount of lump sum rights at 5th April 2006 were increased by changes in the underpinned LTA (£1.8m /£1.5m).
To this was added 25% of the post 5th April 2006 growth. This was calculated by taking the current value and deducting the value as at 5th April increased in line with changes to the LTA.
This approach led to those with LTA protections getting different amounts tax free.
When the LTA was abolished on 6th April 2024 the link to LTA was removed from the calculation and replaced with numeric amounts. The overall result of the changes was that post 5th April 2024 everyone receives the same amount of tax free cash regardless of protection status. Those with LTA protections would receive more tax free under the new formula.
However in Pension Schemes Newsletter 159 HMRC confirmed they were amending the undernoted formula to ensure that those with LTA protections received the same tax free amount as they would have received pre 6th April 2024.
The new formula is
(A × 1.2) + B
where—
A is the value of the individual's uncrystallised lump sum rights under the pension scheme on 5th April 2006
B is the additional lump sum amount (ALSA).
ALSA = [ C + ((D x 4) – (E x 0.7154))] /4
C is the pension commencement lump sum paid;
D is the applicable amount in relation to the relevant pension
E is the value of the individual's uncrystallised rights under the pension scheme on 5th April 2006,
NOTE: The newly defined calculation does not work. In order to calculate D you need to know the amount of PCLS you will actually pay (C). You cannot calculate C without knowing D. There is a circular loop.
Presumably, this circular calculation issue will be resolved by using an amount that is equivalent to the value of benefits being taken (which LS + AC in the previous calculation added up to).
The 0.7154 used to revalue the A day value is also pending change to ensure those with LTA protections get the same tax free cash now as they would have pre 6th April 2024.
Worked Example - Scheme Specific Protected Tax Free Cash |
|
|---|---|
Fund as at 5th April 2006 |
£100,000 |
Tax Free Cash as at 5th April 2006 |
£60,000 |
Current fund value |
£200,000 |
SSPTFC calculation |
|
[£60,000 x 1.2] + [£200,000-(£100,000x 0.7154)]/4 |
|
| Tax Free Amount | £104,115 |
When benefits under a scheme with lump sum protection are transferred to another scheme, the lump sum protection is lost unless the transfer is a block transfer.
Block Transfer Conditions
A single transaction isn’t defined, but in principle all the transfers have to happen as part of one agreement. Practicalities may dictate that transfers take place at different times, but as long as all transfers from the agreement proceed within a reasonable timeframe, a block transfer should have been made.
The scheme receiving the transfer can be any type, and so can be a personal pension, providing the other conditions relating to the block transfer are met.
A number of sequential block transfers can be made without affecting the lump sum protection, providing they each meet the block transfer requirements.
A partial transfer can’t be a block transfer. If a partial transfer takes place, the protected lump sum in the transferring scheme is reduced by 25% of the transfer value. Please note that this reduction does not apply to pension debits from a pension sharing order.
There are certain scenarios where a transfer can be treated as a block transfer, even when it isn't (and might involve one-member schemes such as section 32s or occupational schemes with one member). For this to happen, the winding-up scheme condition and the annuity condition must be met, as described at PTM063150.
It isn’t possible for a member to have two protected tax-free cash amounts in one scheme.
Finance Act 2004: Schedule 36, Paragraph 31(7 - 9)
HMRC Pensions Tax Manual PTM63130, PTM063140, PTM063150
The Pension Schemes (Block Transfers) (Permitted Membership Period) Regulations 2006 - SI 2006/498
Articles 13-16 The Pension Schemes (Transfers, Reorganisations and Winding Up)
(Transitional Provisions) Order 2006 - SI 2006/57
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