Claire Trott: Preparing for the new pension protections

We are gearing up for another new round of pension protection but this time it should have been much simpler. Online applications with no certificates issued and the ability to apply at any point the client wants to with no deadlines. Well, that is what we have been told to expect anyway.

We have known about the drop in the lifetime allowance since the Budget in March 2015, which means we should have seen legislation in the Finance Bill 2015.

We have been told it will follow the same rules as Fixed Protection and Individual Protection 2014 but I am never convinced until I see it in black and white, and with Royal Assent there are often subtle differences that creep in when it is drafted.

I find this lack of planning on HM Revenue and Customs’ behalf frustrating. Pension protection is complicated enough for individuals without taking into account delays that seem completely unnecessary.

What can you do to prepare?

Even though there is no legislation in force as I write this, you must still consider what clients need to do before the end of the tax year (or just after in the case of Individual Protection) in order to secure the protections this time around.

The most pressing decision is whether or not they are going to want to rely on Fixed Protection. If this is the case and they are still an active member of a pension scheme, then they need to prepare to leave that scheme and cease contributions before the end of this tax year.

Even though we do not have the legislation yet it is clear Fixed Protection will be lost, or even ineligible to apply for, if contributions or relevant benefit accrual occurs after 5 April 2016. There is no scope to unwind contributions made after this date should they want to apply sometime down the line.

For clients that want to apply for the protections, now is also the time to look at using up any carry forward they may have available, assuming they are not already over the current £1.25m lifetime allowance.

As mentioned, Fixed Protection will mean no further contributions and individual protection is based on the value of the schemes at 5 April 2016. With this in mind, making extra contributions before this test will maximise the value of Individual Protection. Any increase over and above the protected amount will be subject to lifetime allowance charges either through contributions or growth within the scheme.

For those with benefits close to £1m it may be worth considering making any additional contributions this year if possible in order to give the client the option to apply for both Fixed and Individual Protection. Even though the Individual Protection amount might not be much more than the standard £1m, it may save them some tax charges if they happen to lose or become ineligible for Fixed Protection in the future.

What protection options are currently available?

Individual Protection 2014 is still available for those that qualify, which means they would need to have had benefits valued in excess of £1.25m on 5 April 2014.

One of the issues with this is the valuation basis, in that individuals may not understand the value of their benefits. As with most things pension-related it is not just the amount in the pot. The value is related to the level of lifetime allowance previously used if benefits have been taken since April 2006 or 25 times the benefit in payment if they took benefits before A-Day and nothing since. Uncrystallised final salary schemes also need to be multiplied by 20. It is only uncrystallised money purchase schemes that can be taken at face value. This is where getting all the correct information from schemes is key and advisers are really needed to ask the right questions.

So is it all worth it? One of the issues with the drop in the lifetime allowance is that it is something that needs deciding on now, especially when considering Fixed Protection.

Stopping contributions may not seem like something that is irreversible should things change but opting out of a defined benefit scheme is something that cannot be undone in most cases.

There are many things to consider when looking at these protections and in some cases a lifetime allowance charge is not the end of the world. Opting out of a scheme when there are no other benefits on offer in exchange could still be at the detriment to the client, so consider the long-term implications before rushing into anything. I would rather 75 per cent of something than 100 per cent of nothing at the end of the day.

Claire Trott is head of pensions technical at Talbot and Muir