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Action on protection

Clients are in urgent need of pension protection advice as A-Day looms

With A-Day looming, advisers have some urgent and important decisions to make on behalf of high-earning clients. High-earners, whether in occupational pensions, Sipps or SSASs, have to decide whether to opt for primary or enhanced transitional protection.

Although individuals have until April 5, 2009 to register for transitional protection, those who opt for enhanced protection are not allowed to pay in any pension cont-ributions after April 6. Advisers therefore have to work out – now – which of the two forms of protec-tion is most suitable for each individual client.

People with big pension funds – and the National Audit Office estimates that about 10,000 people will be immediately affected by the new lifetime limit – have to decide whether future investment growth will bring them up against the lifetime limit, currently 1.5m but due to rise to 1.6m in 2007, 1.65m in 2008, 1.75m in 2009 and 1.8m in 2010. Even at an average investment return of 7 per cent a year, someone with a 1.5m pension fund now will see the money grow to 1.96m by 2010 – well over the lifetime limit. If that person is still, say, 10 years off retirement, do they go for primary protection or enhanced protection?

Much will depend on whether they can afford to shovel big amounts into their pension scheme and benefit from establishing a much higher “personal” lifetime limit under primary protection. Primary protec-tion is only available to those with pension funds, or pension entitlement for those who also have final-salary company pension scheme benefits, worth more than 1.5m on April 6.

So pension advisers cannot just look at Sipps, SSASs or personal pensions held by the client. They must also take into account deferred pensions from previous employers and current occupational pension entitlement. This means making some complicated calculations for clients entitled to pensions from defined-benefit pension schemes. In addition, they have to add in the capital value of pensions already in payment. The formula for calculating this for those in pension drawdown is not the actual value of the fund but 40 times the GAD annual maximum pension.

This generally produces a figure of twice the actual fund – all of which counts towards the 1.5m lifetime allowance. With primary protection, if total pension funds exceed 1.5m on A-Day, this fund can be registered as a percentage of the lifetime allowance. This percentage is then applied when the client takes the benefits. A client with, say, a 3m pension fund today (200 per cent of the current lifetime allowance) will be entitled to build up a pension fund of 200 per cent of what-ever the lifetime limit is in the year when benefits are taken.

But any amount above the “personalised” lifetime allowances will be subject to the lifetime allowance tax charge – at a penal rate of 55 per cent. It will clearly pay anyone with a pension fund near or approaching 1.5m to put in as much as they can before April 6 and register it for protection. But should they, perhaps, go for enhanced protection? This is available to anyone who has pension funds either above or below the lifetime allowance of 1.5m on A-Day. Pension advisers who expect the client’s funds to grow above this limit can protect both the existing fund – and all future growth – from the recovery charge. But there is a big drawback – no further contributions to the fund can be made after April. So the decision whether to go for primary or enhanced protection has to be made in the next few weeks, regardless of the 2009 cut-off date for registration.

Others in urgent need of advice are clients who are due to retire now but could defer retirement until after April 6. After A-Day, individ-uals will be able to have both occupational and personal pensions. In the year of ret-irement, there is no limit on the amount which can be put into pension schemes. This means that on April 7, a client could pay in 250,000 to a scheme which already has 750,000 in it, get tax relief on the 250,000 at up to 40 per cent and then retire on April 8, taking 250,000 as a tax-free lump sum.

Money Marketing50 Poland Street, London W1F 7AX

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