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Claire Trott: Extra layers of protection

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The lifetime allowance is a contentious subject; many like me feel it is unfair to test benefits as they are paid in and when they are paid out. You cannot and really should not try and limit the growth of your pension fund, so the lifetime allowance charge is unfair and is just an easy way for the Government to tax those lucky enough to receive good growth on their savings. There are those however, that feel should you be lucky enough to be at or near the lifetime allowance then you should be grateful and happily pay the tax charges due. This is a complex area and many will be unexpectedly caught by the reductions we have seen over the years, especially where they have not used an adviser.

Pensions simplification appears to have been overshadowed by the reforms now in force, but simplification it was not, and clearly it is not now. The lifetime allowance was first introduced along with those reforms back in 2006, in theory to put everyone in the same position when it comes to limiting the amount of tax relieved pension savings you can benefit from.

However, it is never all fair and equal in the world of pensions so those who could, protect pre A-day benefits by way of the protection regimes did so, which back then mainly consisted of enhanced protection and primary protection. The protections each had their own rules and calculations and you could have both, provided you filled the form out correctly and had the right levels of benefits. There were other protections related to retirement age and tax-free cash, but these did not require applications to HM Revenue & Customs. As we now know this was only the start of the layers and layers of protections.

In 2012, we saw the first post A-day drop in the lifetime allowance from £1.8m to £1.5m, bringing with it fixed protection, which thankfully, unlike enhanced and primary protection, was just a simple form with no calculations involved. Like enhanced protection however, you had to cease relevant benefit accrual to all your pension schemes in order to retain it, but the relevant benefit accrual tests for fixed protection are not the same as enhanced protection and should be monitored on an ongoing basis.

2014 brought us to where we are today, a further drop in the lifetime allowance from £1.5m to £1.25m and more protection. For some reason unknown to me, they decided a single type of protection was not sufficient this time. So not only did we see the introduction of fixed protection 2014, which fixed your lifetime allowance at £1.5m provided you ceased relevant benefit accrual, but individual protection first showed its face.

Individual protection is more akin to primary protection than any of the others, it is based on personal levels of savings, provided you had enough to apply. Calculations are again required based on benefits and fund values on 5 April 2014. You needed benefits of at least £1.25m as at this date, which would give you a personal lifetime allowance of the value of your benefits up to a maximum of £1.5m. Those with other protections, such as enhanced and fixed protection were also able to apply for individual protection as a kind of back-up plan should they inadvertently accrue relevant benefits.

The announcement in the 2015 Budget of a further reduction of the lifetime allowance from £1.25m to £1m is set to bring about two more versions of protections, another fixed protection, we assume to be called fixed protection 2016 and the second round of individual protection.

Although we assume the same rules will apply to these protections as they do to the 2014 protection, we cannot be sure. There was no need to change the relevant benefit accrual rules between enhanced and fixed protection so additional complexity could be brought in here, deliberate or otherwise.

The interactions between the different protections, and the effect the reduction of the lifetime allowance has on things such as protected tax-free cash calculations means an even greater need for advisers to be involved in every stage of a clients progress towards and through retirement. 

Claire Trott is head of technical support at Talbot and Muir

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Claire, couldn’t agree more with your thoughts on the purpose of the Lifetime Allowance – makes no sense.

    It also impacts cover under lump sum death benefit registered group life arrangements. I think this is one of the reasons there’s been market growth in 2014 close to 30% in excepted group life schemes and likely more to come ahead of the 2016 change.

    And death benefit only cover should be so simple to provide.

  2. Well said, Claire & Ron!

  3. As a consequence of the systematic reductions in the LTA, pre retirement planning now has to take place up to 20 years before retirement, given the probability that anyone who has made good provision in their early life will now breach the £1m threshold.

    How can it be right that we may be telling a 45 year old not to pay into a pension anymore, or opt out of auto enrolment? The rules may change in the future, but we cannot predict that, so we have to assume that allowances and tax reliefs will not improve.

  4. @ Geoff.

    Agree. If I had known how this would have progressed a lot more clients back in the 2006/2009 era would have been encourage to elect for enhanced protection and retirement planning would have then focussed on other areas…..

  5. I agree with Claire’s article and would add the following point.

    What seems to have been forgotten is the Lifetime Allowance was introduced when the Annual Allowance was £215,000. Between the two, someone could make a 6 figure contribution occasionally, say from an inheritance or switching ISA savings, but were limited to how many times they could do that by restricting the overall outcome. It’s quite right that tax relief is restricted to a point.

    However, now the AA is £40,000 the issue of multiple excessive contributions has been removed so the Lifetime Allowance is redundant.

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