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John Lawson on pensions

Imagine reaching retirement to find 100,000 or more in tax deducted from your pension fund or accrued pension benefit. Then imagine that you subsequently discovered that you could have legitimately avoided this tax had you taken some simple steps a few years earlier. How would you feel?

Yet this is what is likely to happen to a few thousand people within the next five or 10 years. That is unless a prophet tracks them down and tells them what is about to happen to them.

I am, of course, talking about the potential impact of the lifetime allowance charge.

When in spring 2003 the National Audit Office ratified the Inland Revenue’s estimate of people likely to be over the then proposed lifetime allowance of 1.4m, they found that up to 10,000 people were likely to have pension benefits valued above that level. They also said that about 5,000 people had pension funds valued between 1m and 1.4m. All of these 15,000 people should consider claiming protection against the lifetime allowance charge.

But more than just these 15,000 people are affected. Within the next 10 to 15 years, the lifetime allowance will also affect a sizeable number of people with pensions worth less than 1m, depending upon the number of years until their retirement and the growth of their fund or pension entitlement in the intervening years. This could easily add another 10 or 15,000 to the numbers needing to claim protection.

Remember also that the NAO estimates are now two years old. Stock markets have since climbed by 50 per cent or more and the pay of higher earners is likely to have risen by 20 per cent or more by the time A-Day arrives.

Although it is almost impossible to calculate an exact number, I believe that about 40,000 to 50,000 people should seriously consider claiming protection against the lifetime allowance charge. Most of them are oblivious to this need, but luckily, their numbers are matched one-for-one by the number of prophets (financial advisers) in the UK.

Those most likely to slip through the net are members of defined-benefit schemes. The reason for this is that financial advisers do not generally have an ongoing relationship with members of such schemes. Sure, there are professionals such as actuaries and consultants who advise employers and trustees of such schemes, but this advice doesn’t filter down to individual employees.

This situation leaves financial advisers in a strong position. But only if they actively seek out those employees sleepwalking towards taxation hell. And it shouldn’t be too difficult to grab their attention if you can find them. If someone told me that they could save me 100,000 tax in five years time, I would happily pay them 5,000 now for their valuable advice.

To play in this market, advisers need to understand the transitional protection rules inside out. These rules are extremely complicated.

For example, how many advisers are aware that in certain circumstances members of defined-benefit schemes can claim enhanced protection and continue accruing further 60ths or 80ths? How many advisers are conversant with the rules for valuing pension benefits at A-Day? Are advisers aware that valuation rules are different for public sector schemes?

If your knowledge of the enhanced and primary protection rules is up to scratch, you are well on your way to being able to profit from your prophecy. You are also likely to be one of a tiny minority. And the laws of supply and demand mean that you should be able to charge a premium price for your expertise.

John Lawson is marketing technical manager at Standard Life


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