Pensions – protected lump sums
Draft legislation has been published to address a practical issue, with retrospective effect from 6 April 2006, in relation to the taxation of pensions. The change specifically relates to the tax treatment of protected pension lump sums and will help ensure that recipients do not lose tax free benefits.
One of the conditions that must be met for a protected pension lump sum to be paid tax free is that the recipient must become entitled to all of their pensions (that were not in payment by 5 April 2006) under the scheme on the same day. This condition cannot always be met by pension scheme administrators for practical reasons. This usually happens in cases where the recipient of a final salary arrangement has made additional contributions to a money purchase arrangement within the same scheme with a view to purchasing an annuity later to supplement their scheme pension.
Once finalised the draft legislation will amend the ‘same day’ condition so that three months grace is allowed before the transitional protection is lost.