IFAs with clients who expect to break the £1.4m lifetime limit face an advice dilemma over the Inland Revenue's proposals for transitional protection, warns Scottish Life head of pensions strategy Steve Bee.
Bee says IFAs face a difficult choice between recommending clients to leave their occupational scheme or stay in and risk being hit by the recovery charge.
The Revenue's proposals say an individual wanting to protect rights they think may break the lifetime limit must choose between primary or enhanced protection at A-Day.
Registering for primary protection links the pre-A-Day value with the indexation of the lifetime limit. Enhanced protection is geared at those who will have left their scheme before A-Day and expect the growth of their fund to outstrip that of the retail price index.
The Revenue gives an example of an individual with a pre-A-Day money-purchase pot of £1.12m, opting for enhanced protection and, because the fund grows to £2m while the lifetime limit only grows to £1.8m with indexation, is better off.
This would protect against tax, but the individual has to leave the occupational scheme, which is something that few advisers would want to recommend.
But Bee warns if the limit had risen to £2m while the enhanced protected fund had only grown to £1.8m, the client could blame the adviser for the advice given.
Bee says: “This issue is likely to hit far more people than are likely to be hit by the lifetime limit at A-Day and they will have to elect whether to take protection or not by that date. Taking enhanced protection is code for Get Out of Pensions and I am not sure you could find a single adviser prepared to make a recommendation on this issue.”