LEGISLATION UPDATE THE LIFETIME ALLOWANCE, FIXED PROTECTION 2014 AND METLIFE REGISTERED GROUP LIFE POLICIES

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1 FOR INTERMEDIARY USE ONLY FEBRUARY 2014 LEGISLATION UPDATE THE LIFETIME ALLOWANCE, FIXED PROTECTION 2014 AND METLIFE REGISTERED GROUP LIFE POLICIES This update is a summary of MetLife s interpretation of the impact of a MetLife Registered Group Life policy on Fixed Protection 2014 in respect of the upcoming reduction in the lifetime allowance, and is based upon member guidance issued by HM Revenue & Customs (HMRC). If your clients members are in any doubt as to what they need to do in respect of their lifetime allowance, then they must seek independent financial advice. WHAT IS A REGISTERED PENSION SCHEME? A registered pension scheme is one that is recognised by HMRC for paying or accruing (increasing) benefits in a way that is favourable for tax purposes. They are often set up by an employer for the benefit of their employees. An employer s registered pension scheme can provide pension and / or lump sum death benefits. Lump sum death benefits can be provided by the employer s existing registered pension scheme. Alternatively they can be provided by a registered pension scheme set up to provide death benefits only, written under trust and under its own rules. This is known as a standalone group life insurance scheme and is classed as an occupational pension scheme under the Finance Act WHAT IS THE LIFETIME ALLOWANCE (LTA)? The LTA is the maximum amount of lump sum and / or pension that benefits from tax relief (a combination of exemptions and deductions on income and expenditure to recognise taxable income) for an individual receiving benefit from their registered pension schemes. The LTA reduces from 1.5 million to 1.25 million from 6th April WHAT IF AN INDIVIDUAL EXPECTS THEIR PENSION SAVINGS TO BE WORTH MORE THAN 1.25MILLION WHEN THEY COME TO TAKE THEIR BENEFITS? These individuals can apply for Fixed Protection This must be done prior to 6th April Fixed Protection 2014 gives individuals an LTA of 1.5million. Fixed protection 2014 is not available to anyone with: Primary Protection (introduced to protect an individual s pension savings if their savings on 6th April 2006 exceeded the LTA at that time); Enhanced Protection (introduced to protect an individual s future pension savings if on 6th April 2006, their growth was expected to exceed the LTA); or Fixed Protection (introduced to protect an individual s pension saving if their savings on 6th April 2012 exceeded the LTA at that time).

2 CAN AN INDIVIDUAL LOSE FIXED PROTECTION 2014 ONCE THEIR APPLICATION FOR FIXED PROTECTION 2014 HAS BEEN ACCEPTED BY HMRC? Yes, they can lose their Fixed Protection 2014 if one of the following events occurs: They have benefit accrual (benefits increase in value). This means that an individual cannot make any new contributions if they are a member of a money purchase arrangement (a defined contribution arrangement that is set up by an employer in order to provide pension benefits to its employees). A defined contribution arrangement is a pension scheme where the future income is based on the fund value at retirement, rather than a fixed guaranteed income at outset. They start a new arrangement (join a registered pension scheme) other than to accept a transfer of existing pension rights. This means that an individual cannot open or join a new pension arrangement under a registered pension scheme, unless it is to receive a transfer of rights from an existing pension arrangement; There is an impermissible transfer into an arrangement; or A transfer is made that is not a permitted transfer. WILL AUTOMATIC ENROLMENT AFFECT AN INDIVIDUAL S FIXED PROTECTION 2014? The Pensions Act 2008 requires all employers to automatically enrol their employees into a qualifying pension scheme (if they re not already in one), and then contribute to that scheme. Each employer has been given a specific staging date to do this. Employees can opt out of auto-enrolment if they wish (within a month to receive a refund of pension payments already made), but they will be automatically enrolled back into the scheme every three years. Fixed Protection 2014 may be lost if an individual is automatically enrolled into a qualifying workplace pension scheme. Individuals must opt out of the scheme within one month of being enrolled to avoid losing their Fixed Protection They will have to do this every three years when they are re-enrolled back into the scheme. SO IS PAYMENT OF INSURANCE PREMIUMS FOR A METLIFE REGISTERED GROUP LIFE POLICY ON OR AFTER 6TH APRIL 2014 CONSIDERED BENEFIT ACCRUAL? At this point, it is important to differentiate between the benefit, which is promised to an employee (or scheme member) by the trustees of a pension scheme, and an insurance policy, which the trustees may put in place to help them pay for some or all of the benefits they have promised to the employees should they become payable. HMRC has issued member guidance in respect of Fixed Protection The full guidance can be found using the following web address: It must be noted that an individual joining a registered scheme after they have received their Fixed Protection 2014 certificate will result in loss of their Fixed Protection 2014 because this is classed as a new arrangement, even if this is a standalone group life scheme. An existing scheme switching the insurance policy that backs the lump sum death benefits (LSDB) to another insurer is not considered a new arrangement. If your client s registered pension scheme: does not provide ANY pension benefits (being linked to another pension scheme is not relevant); and is a standalone group life scheme, only providing lump sum death benefits which are insured in part or all with MetLife; and the lump sum death benefit is a defined benefit within the scheme rules; then payment of insurance premiums in respect of this scheme will not affect an existing insured member s Fixed Protection Do remember that the lifetime allowance is considered at an individual level, so someone intending to apply for Fixed Protection 2014 will need to look at all of the registered pension schemes they may be a member of. If an individual member is unsure of their particular circumstances, they may need to seek their own independent financial advice.

3 DEFINED BENEFIT ARRANGEMENT HMRC has stated that the following examples will not involve any other money purchase benefit and therefore not lead to benefit accrual and loss of Fixed Protection (Examples of defined benefit arrangements where LSDB is a multiple of salary) i. LSDB is paid out of scheme funds. ii. iii. iv. LSDB is backed by an insurance policy. If the policy proceeds exceed the LSDB, the excess is paid to and retained within the scheme. LSDB is backed by an insurance policy. Scheme is liable for any shortfall where proceeds of the policy are insufficient to fully fund cost of the LSDB. LSDB is backed by an insurance policy. The policy will not pay out more than the LSDB but restrictions may result in a LSDB payable that is less than the unrestricted defined LSDB e.g. a catastrophe event limit being applied. The restricted LSDB payable can be expressed as a defined benefits LSDB if:, i. It represents a % of the original defined benefits LSDB; ii. Is paid on a pro-rata basis; iii. It is expressed as a lower amount; or iv. The maximum paid under the policy is capped. v. An individual has restricted benefits under one policy, but a further policy is taken out by the scheme in respect of the individual to ensure the maximum x * final salary LSDB is paid. The top-up policy must not be an other money purchase arrangement. You do not need to consider restrictions that do not apply to individuals who may have Fixed Protection 2014 in the future. OTHER MONEY PURCHASE ARRANGEMENT This is a money purchase arrangement that is not a cash balance arrangement.

4 HYBRID ARRANGEMEMT This is an arrangement that combines both elements of a final salary pension and money purchase scheme. Type of arrangement When scheme set up Type of contribution Fixed protection could be lost when taking out cover for LSDB Defined benefit N/A N/A No Other money purchase e.g. the only LSDB is an amount equivalent to the proceeds of an insurance policy with no provision for a defined benefits LSDB Hybrid Before 6th April 2006 (other HMRC conditions must be met) N/A On or after 6th April 2006 N/A Yes N/A Relevant contribution* Yes No e.g. where LSDB is greater of defined benefit and policy proceeds N/A Contribution that is not a relevant contribution* No *relevant contributions are tax-relievable pension contributions paid by or for an individual. MY CLIENT HAS A SCHEME WITH MEMBERS WHO MAY BE APPLYING FOR FIXED PROTECTION HOW DO I KNOW WHAT KIND OF ARRANGEMENT THEY HAVE? If you don t already know, you will need to ask the scheme administrator what kind of scheme is in place. MetLife, as an insurer providing the cover for LSDB provided by the scheme, will generally not know the kind of scheme arrangement in place. This is because as long as the scheme is registered with HMRC, the type of scheme arrangement in place does not affect the MetLife Registered Group Life insurance policy covering the LSDB. WHAT IF LIFE COVER WAS STOPPED FOR INDIVIDUALS BECAUSE THEY BELIEVED CONTINUING TO PAY PREMIUMS ON OR AFTER 6TH APRIL 2014 WOULD BE CONSIDERED BENEFIT ACCRUAL AND LEAD TO LOSS OF THEIR FIXED PROTECTION 2014? Life cover can be reinstated without it being considered a new arrangement as long as: Cover is reinstated as soon as possible. It does not necessarily have to be with the same insurer; and The basis of the cover has not been increased compared to what was previously provided. WHAT IS INDIVIDUAL PROTECTION 2014? In addition to Fixed Protection 2014, HMRC are also introducing Individual Protection The details of this have not yet been confirmed, but it is expected that it will give individuals a personalised LTA based on the value of their pension savings as at 5th April 2014; up to 1.5 million. Individuals will be able to continue pension saving after 5th April 2014, whilst at the same time protecting the tax-relieved savings accrued already up to that date; subject to an overall maximum of 1.5 million. Individuals can apply for Individual Protection 2014 from 6th April 2014, and will have 3 years to do so. Individuals can apply for both Fixed Protection 2014 and Individual Protection 2014, but obviously not at the same time. HMRC have recently consulted on the detail and implementation of Individual Protection 2014 alongside Fixed Protection The focus was on the most fair and efficient way to implement the policy. This consultation closed 2nd September 2013.

5 SUMMARY On 6th April 2014, the lifetime allowance will reduce to 1.25 million. HMRC expect this reduction to affect a wider population than the previous LTA reduction to 1.5million. Fixed Protection 2014 has been introduced for people whose pension benefits are expected to exceed 1.25 million when they take the benefit. This must be applied for prior to 6th April Individual Protection 2014 will be introduced from 6th April It is important to differentiate between the benefit, which is promised to an employee (or scheme member) by the trustees of a pension scheme, and an insurance policy, which the trustees may put in place to help them pay for some or all of the benefits they have promised to the employees should they become payable. Fixed Protection 2014 will be lost if an individual starts a new arrangement or has benefit accrual. Payment of insurance premiums for a MetLife Registered Group Life policy: - Should not result in the loss of Fixed Protection 2014 if it is a defined benefit arrangement, an other money purchase arrangement set up before 6th April 2006, or a hybrid arrangement making non-relevant contributions; or - Could result in the loss of Fixed Protection 2014 if it is an other money purchase arrangement set up on or after 6th April 2006, or a hybrid arrangement making relevant contributions. If an individual member is unsure of their particular circumstances, they should seek their own independent financial advice. FOR FURTHER INFORMATION If you have any further questions please feel free to contact us on Products and services are offered by MetLife Europe Limited which is an affiliate of MetLife, Inc. and operates under the MetLife brand. MetLife Europe Limited is authorised by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. Registered address: 20 on Hatch, Lower Hatch Street, Dublin 2, Ireland. Registration number UK branch address: One Canada Square, Canary Wharf, London, E14 5AA. Branch registration number BR PNTS M l JAN 2014