HMRC concern at low take-up of pension protection
HM Revenue & Customs’ officials are understood to be surprised over the low number of people who have applied to protect their pension fund following the Government’s decision to cut the lifetime pension allowance.
Last year, ministers set out sweeping changes to pension rules which saw the annual allowance for tax-privileged pension saving cut from £255,000 to £50,000 from April last year.
The lifetime allowance will also be reduced from £1.8m to £1.5m from April 6 this year. Savers have until April 5 to apply for fixed protection to retain the £1.8m allowance for their fund. Failure to apply for fixed protection will result in savings above £1.5m being taxed at 55 per cent, potentially costing investors hundreds of thousands of pounds.
Money Marketing understands HMRC officials have commented that they have not received the number of elections for fixed protection they had anticipated.
HMRC refused to comment on the issue.
Wingate Financial Planning director Alistair Cunningham says this is a cause for concern because advisers should be on top of the issue.
He says: “The deadline for applying for fixed protection has been very short but, even so, any good IFA will have already identified the clients who should be protecting their fund.”
The deadline for applying for fixed protection presents a practical problem for any IFA considering leaving it until the last minute. April 5 is the last working day before the Easter bank holiday weekend, so advisers are being urged to send in the forms early to avoid potential delays.
Axa Wealth head of technical sales Andy Zanelli says: “This might sound like a minor issue but it is something advisers need to think about because if HMRC does not receive the election form by April 5, they simply will not allow you to claim fixed protection.”
There are also potential problems for public sector workers with big final-salary pension pots. In January, Money Marketing revealed industry concerns over NHS delays in getting statements of benefits ahead of the April deadline.
IFAs say the NHS superannuation scheme is taking at least three months to respond to requests for a statement of benefits although the NHS says it aims to handle requests within four to six weeks.
Richard Jacobs IFA director Richard Jacobs says: “We have not been able to get any information out of the NHS. This is a potential calamity waiting to happen. I have had to put so many disclaimers in my letters to clients on this subject that the advice is not worth the paper it is written on.”
Even savers who have already applied for fixed protection need to be aware of costly pitfalls before and after April 5.
Last November, Legal & General pensions strategy director Adrian Boulding warned that high-earners in group personal pensions could unwittingly lose their fixed protection as a result of differences between The Pensions Regulator and HMRC rules.
Boulding says: “If someone is in a GPP or a group stakeholder scheme, the March contribution deducted at the end of the month will be judged by HMRC according to the date at which the employer passes the money to the insurance company.
“If the employer sends it later than April 5, 2012 - and The Pensions Regulator is happy for employers to send pension contributions over any time up to the 19th of the month - then it will be treated as a contribution in the 2012/13 tax year, with a disastrous immediate loss of fixed protection.”
Automatic enrolment, which is due to begin for the UK’s biggest employers from October this year, also presents a potential problem for clients with fixed protection.
Last August, official HMRC figures revealed that 18,000 people were at risk of losing their pension protection by inadvertently being automatically enrolled into a pension scheme as fixed protection is lost if further contributions are paid into the fund or benefits accrued.
AJ Bell marketing director Billy Mackay says: “Anyone who has protected their pension needs to take measures to make absolutely certain they opt out of being auto-enrolled as the financial consequences could be catastrophic.”
The Department for Work and Pensions is working with the Revenue to alert customers to the issue.
A DWP spokeswoman says: “We are working with HMRC to alert individuals with enhanced protection in advance of the new employer duty coming in.
Those applying for fixed protection will be provided with information at the time of application to inform them about auto-enrolment and the action they will need to take.”
Axa Wealth says the Government should delay the dead- line for applying for fixed protection by 12 months due to concerns about advisers’ workloads resulting from the RDR and regulatory changes.
Zanelli says: “Advisers have a huge amount to deal with at the moment. They are preparing their businesses for the RDR while coping with an economic crisis and a huge overhaul of pension rules and regulations.
“Given all these pressures, I think HMRC needs to look at the rationale for the April fixed protection deadline. Pushing the deadline back by 12 months would not burden the Revenue and would give IFAs breathing space.”