Revision Study Tip
Question 3 of the April 2019 asked you to explain why the client (in this case, Dennis) was unable to benefit from any currently available form of transitional protection.
This one has come up previously, in the October 2017 sitting. There is every prospect of it coming up again. The syllabus requires you to assess how lifetime allowance and transitional protection may impact a transfer recommendation.
Simply put, the rules are as follows:
The ONLY transitional protections which are currently available are FP16 and IP16. So in a question such as this, there’s no point wasting your time getting into lengthy discussions on the others. They are gone. Kaput. Finito! Enhanced and Primary Protection haven’t been available for new registration since 2009! FP12, FP14 and IP14 are also now closed. So that’s all you need to say on this. Focus on the ones the client could in theory apply for.
Now, the key here is the conditions under which they can apply for them. So, when it comes to FP16, this fixes the lifetime allowance at a flat rate of £1.25m. The key point is that the client needs to have ceased benefit accrual as of 5 April 2016. This means that:
• They cannot contribute to a defined contribution scheme;
• They cannot accrue any increase in the value of their defined benefit entitlement, other than in line with inflation or any other rate of increase set out under scheme rules (for example, GMP).
The effect of point (2) is that it is pretty much impossible to remain an active member of a defined benefit scheme active 5 April 2016 and retain fixed protection. To register for and retain FP16, the member would have needed to have left their scheme.
So anyone who has applied for FP16 and who subsequently either contributes to a money purchase scheme or accrues benefits under a defined benefit arrangement, would lose it. This includes those who are auto-enrolled and do not opt-out within a month of enrolment. Though scheme administrators can decline to enrol members if they have reason to believe that they have transitional protection which may be impacted.
Both Dennis (April 2019) and Billy (October 2017) have accrued benefits within a scheme since April 2016. Dennis has contributed to a defined contribution scheme and Billy has remained a member of his DB scheme. Ergo, both would lose the protection instantly should they apply for it.
IP16 is different and fixes the individual’s lifetime allowance at the level of their benefits as of 5 April 2016. This doesn’t stop them accruing further benefits, however, these benefits would be subject to a lifetime allowance excess tax charge. However, to apply for this type of protection, your benefits at 5 April 2016 needed to be greater than the new standard lifetime allowance of £1m. Looking at the value of the members’ benefits, you can see that neither meets that criteria. Therefore, neither can apply for IP16 either. Have a look at our video for a more in depth explanation.
These are the kind of curveballs that can come up in the AF7 exam and our goal at EPL is ensure you are prepared for them. We get you doing the doing – so you are good and ready![Click here for our AF7 Revision Digital Download Resources]