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Adrian Walker: Don’t forget individual protection

While individual protection applicants may also consider enhanced protection, fixed protection 2012 and fixed protection 2014, many others will view individual protection as the sole shield around annual taxation of their pension savings, opening up the opportunity for advice

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The reduction in the lifetime allowance to £1.25m for this tax year has caused a significant number of pension savers to consider protecting their savings (built up by the end of last tax year) from a lifetime allowance tax charge.

HM Revenue & Customs has already indicated that around 60,000 clients have registered for fixed protection 2014. This will protect the eventual value of private pension savings, up to £1.5m, from a lifetime allowance tax charge. 

This is in addition to clients who had previously registered their savings for fixed protection 2012 or enhanced protection, where higher levels of pensions could be protected from a lifetime allowance charge.

Clients who registered for any of these forms of protection had to accept that they were in effect opting out of future pension savings accrual. This may be easy to control in terms of making no further money purchase savings; but there is a risk to clients who remain active members of final salary schemes. Rules that apply to what is deemed relevant benefit accrual from such schemes could invalidate existing forms of protection they have.

Individual protection

As a safeguard, clients will be able to register the value of their pension savings for individual protection. This will protect the savings between £1.25 and £1.5m and is dependent on the actual value of a client’s individual pension savings as at 5 April 2014. HMRC estimates that 110,000 individuals will register for individual protection but what are the critical points for advisers?

Timing: Clients will have up to three years from April in which to register protection with HMRC.  But they will not be able to register until the Finance Bill has received royal assent. The current likely date to register is August 2014.

Benefits: Where the value of the fund at the end of the last tax year exceeds £1.25m, individual protection could provide some defence against additional tax charges in the event of earlier forms of protection being lost through inadvertent invalidation.

Value: Ensuring the value of all pension savings at 5 April 2014 is known is something that advisers should be working towards now. This will enable registration for individual protection to be made as quickly as the legislation permits.

Practical issues in providing benefits

Until a client has registered for individual protection and a certificate with the protected value is available, there are practical issues to be addressed in providing authorised benefits.

Benefits over the standard lifetime allowance will be treated as authorised member payments but only if administrators can be certain individual protection certificates will be available before the scheme has to provide a quarterly return to HMRC. Otherwise any benefits paid over the standard lifetime allowance will be treated as an unauthorised payment. 

Tax charges will be applied to lump sums or income payments that relate to the excess capital. These can be reclaimed from HMRC once the certificate is received, but with a period of investment loss to a client.

To avoid customer detriment, Skandia will provide benefits only within the standard lifetime allowance until the client can provide an individual protection certificate. This will allow the additional savings to be provided as authorised member payments.

Similar issues apply where the benefit being crystallised includes scheme specific lump sum protection. Until an individual protection certificate can be produced, any lump sum paid will exceed that which should be payable, thereby creating an unauthorised member payment and a consequent additional tax charge on the payment.

A number of those who will apply for individual protection will do so alongside enhanced protection, fixed protection 2012 and fixed protection of 2014.

But while they may be able to rely on existing forms of protection as a basis for crystallising benefits in the near future, there will be many, probably in the region of 30,000, who will likely rely solely on individual protection to avoid annual allowance tax charges on part of their savings – and for whom advice can add significant value.

Adrian Walker is retirement planning manager at Skandia

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