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Case study: Should a client take fixed or individual protection?

Clients with unprotected pension savings worth more than £1.25m need to consider fixed or individual protection or whether they should apply for both.


The problem: A client will be affected by the reduction in the lifetime allowance next April. Should he opt for fixed or individual protection?

The solution: The lifetime allowance for pension savings will reduce to £1.25m from 6 April 2014. As well as the availability of Fixed Protection 2014 the Government has also proposed a second form of fund protection that would allow future benefit accrual. That proposal has now taken a step forward with a consultation document, including draft legislation, being issued by HMRC on 10 June 2013.
Key Points from the consultation document
Individual Protection 2014 (IP14) is intended to allow protection from the lifetime allowance charge for funds valued between £1.25m and £1.5m as at 5 April 2014. Individuals with funds greater than £1.5m can apply but IP14 will be capped at £1.5m. Individuals need a fund of at least £1.25m at this date to apply and must not already be registered for Enhanced or Primary protection. The IP14 amount will become the standard lifetime allowance amount for the individual.

Individuals with IP14 can continue to accrue future pension benefits without losing entitlement to IP14. This is the critical difference when compared to Fixed Protection 2014.

To maintain fixed protection, no further contributions can be received by a DC scheme on or after 6 April 2014, individuals in a DB schemes must not accrue further benefits above a ‘relevant percentage’ from 6 April 2014. This will normally be either the annual rate of increase specified in the scheme rules as at 11/12/2012 or the increase CPI (if no rate is specified).

The personalised limit under IP14 is fixed and will not increase over time. However, it can reduce if there is a pension debit on divorce. IP14 cannot be given up by the individual but will automatically cease should the SLA increase to a higher level than the personalised allowance.

It will be possible to have both Fixed Protection (2012 or 2014) and individual protection. Those with funds over £1.25m as at 5 April 2014 should claim both. As currently proposed this will be a two stage process;          
Fixed protection 2014 must be claimed before 6 April 2014
An individual protection claim will have to wait until Royal Assent of Finance Bill 2014.

Fixed protection 2014 will take priority over Individual protection so an individual claiming both will have a lifetime allowance of; £1.5m if no contributions are made and no accrual occurs after 5 April 2014; or their total benefit value (between £1.25m and the £1.5m cap) as at 5 April 2014 if contributions/accrual take place

There is no downside in opting for both. For individuals with DC benefits when benefits are drawn, if the total value is below the Individual protection figure it may be possible to top up back up to that level. Consider the following case study…
Tom had no existing form of fund protection. The value of his Sipp as at 5 April 2014 is £1.4m and he expects to take retirement benefits in 2017/18 tax year. He opts for Fixed Protection 2014 before the end of tax year 2013/14. Contributions then cease. In September 2014 he also claims Individual protection based upon the £1.4m value at 5 April 2014.
What happens if the value of his Sipp falls before he takes benefits?     

Tom’s SIPP is worth £1.3m when he comes to take his benefits in 2017/18 as investment markets have been poor in the interim. As he has individual protection he can make further contributions. Assuming he has sufficient earnings and carry forward he can make a contribution of £100,000 to bring his SIPP value up to his £1.4m individual protection allowance. This will mean that Fixed protection 2014 is lost. Tom will need to report the change to HMRC within 90 days of the contribution
However, without the claim for individual protection Tom would be unable to replace the lost pension value as paying a contribution under Fixed protection invalidates the protection.

Tom’s employer currently pays 15 per cent of salary into his pension. If Tom opts for fixed protection this contribution will have to stop. An election for individual protection will allow this contribution to continue fwhilst providing lifetime allowance protection on £1.4m of his funds.
Without individual protection continuing contributions would mean a reduction in lifetime allowance to £1.25m making an additional £150,000 of Tom’s pension fund subject to the lifetime allowance charge.

Mark King is technical consultant at Axa Wealth



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