In 2018, the European Court of Justice ruled individual members of the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS) should receive at least 50% of the value of their accrued pension if the employer responsible for funding the scheme they had paid into fails.
The PPF stated at the time that the majority of its members and those paid under the FAS were already in receipt of this level of benefits, therefore most members wouldn’t be seeing an increase.
But further court proceedings in 2019 resulted in the compensation cap being removed entirely, meaning more members would be subject to an increase in benefits – for some, significantly so.
We are now seeing these increased offers dropping onto members’ doormats. And while, this is a positive for most, some will have lifetime allowance (LTA) implications that will need to be dealt with.
What are the implications on calculations?
The PPF will provide the member with updated options for benefits as well as the LTA figures. It’s therefore important to ensure these changes are dealt with.
If the increase in benefits doesn’t result in an LTA charge with the PPF but benefits have been subsequently taken from other schemes, then these schemes will need to be informed of this increased use.
In a rare case, a scheme may be exhausted or the benefits unable to be reduced, so no funds are available to pay the LTA charge
This could result in one of the other schemes now having to apply an LTA charge. In any case, it will reduce what is available for use in the future.
If the increase results in a charge on the PPF, then this will be payable by reduction of these new benefits and the scheme will offer various options such as maximum lump sums, with the associated charges applied.
Again, all schemes crystallised after the date of original payment from the PPF will need to be notified in order, which may result in more tax charges being applied.
In a rare case, a scheme may be exhausted or the benefits unable to be reduced, so no funds are available to pay the LTA charge. In these circumstances, the scheme can apply to be relieved of their responsibility to collect and pay the charge. This will fall on the member to pay through self-assessment.
What can be done?
If the member is entitled to apply for Individual Protection 2016 or Fixed Protection 2016, this should be done before accepting the compensation increase.
The certificate number should be passed onto the PPF and all other schemes before the updated lifetime allowance usage is calculated to reduce or rule out any charges. This could take some time to gather the data and may also come at a charge, since schemes have been able to charge for this information for some time now.
Although the increase in compensation from the PPF does not count as accrual, so won’t impact annual allowance charges or invalidate any protections already in place, the very fact benefits were reduced because of the cap could mean members continue to fund their pensions.
This would mean they have unnecessarily missed out on protections they may have sought should they have been expecting a full pension from the PPF and not the reduced amount.
The PPF suggests that, with HM Revenue & Customs (HMRC) permission, it could be possible to unwind any contributions paid since 2016 to give members the option to apply for Fixed Protection 2016. That said, this would be a significant challenge for many providers to deal with and may cause more problems with returning any tax relief already received.
The PPF has also suggested HMRC may consider applications for older protections. This could have some merit because it isn’t the member’s fault the protection didn’t appear to be available.
The PPF states there is wording available for these requests and members should contact it directly about this.
Claire Trott is divisional director, retirement and holistic planning, at St. James’s Place
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