If a transfer does not meet the block transfer requirements, it will still be a recognised transfer (and therefore an authorised payment), but the protection will be lost on the funds that are transferred.
If only part of the funds are transferred, the funds not transferred will still retain the protection.
How does the calculation work?
Before we get on to the calculation and an example, let’s look at the constituent parts.
There are two key figures, and they both relate to the member’s lump sum entitlement at A-Day. These are:
- VULSR = value of uncrystallised lump sum rights as at April 5 2006.
- VUR = value of uncrystallised rights as at April 5 2006.
As the names suggest, these represent the value of the tax-free lump sum rights and the value of the uncrystallised funds to which that lump sum related.
These figures were calculated and recorded shortly after A-Day by the scheme administrator. There was no need to notify HMRC of the figures.
Accordingly, there is no certificate for this like there was for enhanced protection and primary protection.
If the lump sum is preserved on transfer as part of a block transfer, the transferring scheme will provide these figures to the new scheme.
The calculation also uses three lifetime allowance (LTA) figures:
- ULA = underpinned lifetime allowance, which is always £1.8m.
- FSLA = former standard lifetime allowance, which is always £1.5m (the standard in 2006-07).
- CSLA = current standard lifetime allowance, i.e. whatever the LTA is when the member takes benefits.
Here is the calculation itself. Before we go through an example, let’s unpack this a bit to try and understand what it is doing.
PCLS = Lump Sum (LS) + Additional Lump Sum Amount (ALSA)
LS = [ VULSR x (ULA / FSLA) ]
ALSA = [ (LS + AC) – (VUR x (CLSA / FSLA)) ] x 25 per cent
The calculation is split into two parts.
The first part (LS) takes the lump sum at A-Day and revalues it in line with changes to the standard LTA since that date. This serves as a kind of indexation of the lump sum.
The government reduced the standard LTA on April 6 2012 from £1.8m to £1.5m, but allowed the calculation to carry on using £1.8m. £1.8m divided by £1.5m equals 1.2.
Therefore, the A-Day lump sum rights are effectively uplifted by 20 per cent.
The second part (ALSA) calculates the PCLS on any growth and contributions since A-Day.
When working through the ALSA part, the ‘(LS + AC)’ element is best understood as just meaning the whole of the funds from which the member is now taking benefits. From this figure, you deduct the value of the VUR, which is also revalued using LTA.
Strangely, the revaluation in the second part of the calculation uses the current standard LTA (CSLA) rather than the underpinned LTA of £1.8m.
The effect for the member is positive, however, as it reduces the value of the VUR, meaning less is deducted, and more is available for PCLS.