Defined Benefit Lifetime Allowance calculations
Defined Benefit schemes, commonly known as Final Salary schemes, have the likely tax charge on them calculated differently from a money purchase or personal pensions scheme.
Overseas we see inexperienced advisers saying that the Cash Equivalent Transfer Value (CETV) should be used in calculating Lifetime Allowance. We have seen as particularly prevalent in the EU and the USA. This is incorrect.
Transfer Analysis (TVAS) conducted from anywhere outside UK regulations, in jurisdictions such as Spain, Switzerland, Isle of Man (IOM) and Gibraltar, are unreliable and some of the ones we have seen are mis-leading and promote the wrong outcome.
The method by which the position for potential tax should be calculated is in relation to the actual income crystallisation multiplied up by 20 along with an additional calculation for any PCLS taken as well as any other pensions that have been crystallised and already used up a percentage of any allowance. If those pensions have not yet been crystallised then they will be assessed in the future utilising the lifetime allowance or protected lifetime allowance at that point, and subtracting the percentage of lifetime allowance previously used by the defined benefit (final salary) scheme.
Yes, it is complicated!
It can become even more complicated when taking into account pension input periods and the decision of taking defined benefits earlier or later than the scheme retirement age.
The valuation of a Final Salary scheme is done on the basis of a multiplication of the expected annual income at retirement or actual income if being crystallised.
There are three key issues:
1. Transfer value (known as the Cash Equivalent Transfer Value (CETV)) can be completely different and will be used in future Lifetime Allowance calculations if transferred.
2. You may elect to ask the trustees to take benefits early or delay them and this will impact on your Lifetime Allowance calculation.
3. Other pension schemes must be taken into account, as well as any protections linked to the DB scheme of PCLS (which may be higher than 25%).
Only use UK regulated advisers with UK regulated TVAS
New UK regulations in place mean that the advising on taking benefits or transferring benefits on a Defined Benefit (Final salary) scheme should only be undertaken by a currently regulated UK adviser qualified with a specific pension examination. Unfortunately, we are seeing non-qualifying advisers and salesmen getting round this obstacle by using a “SIGNING OFF SIGNATURE” from unscrupulous firms that are setting up and then shutting down making it difficult to track or regulate them. By the time the regulator finds them the firm no longer exists. These firms often based in Spain and Switzerland, Isle of Man (IOM) and Gibraltar are often using Transfer analysis (TVAS) provided by firms based out of the Isle of Man (IOM) or Gibraltar, and these TVAs would not meet the UK scrutiny requirements for providing this advice.
Do not under any circumstances obtain advice on Defined Benefit (Final Salary) schemes from non-regulated advisers outside the UK, and be extremely cautious about using advisers that require “signing off” by another firm, especially where those firms are operating or linked to TVAS calculations from places outside the UK. The worst examples we have seen have come from Switzerland, Spain, Isle of Man (IOM) and Gibraltar.