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Mark Pearson: Is exceeding the lifetime allowance so bad?

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When it was first suggested that a measure of personalised protection would be introduced to counter the effects of a further reduction in the lifetime allowance, it seemed many clients would face some complex decisions. 

But individual protection is much simpler than was anticipated. An election for individual protection cannot be made by anyone with a total capitalised value of pension funds of £1.25m or less on 5 April 2014. Those with enhanced or primary protection cannot claim either fixed or individual protection.  

Individuals with funds in excess of £1.25m, including those with fixed protection 2012, will be able to apply for individual protection 2014 and can continue to accrue rights. It is possible to have both fixed protection 2014 and individual protection 2014 or fixed protection 2012 and individual protection 2014 but fixed protection will always take precedence.

So far, there seems to be no downside to electing for both fixed and individual protection but the fine-tuning will not be complete until later this year and will not become law until the Finance Act 2014 is passed.

The good news is there will be a three-year application window, which gives time to consider individual protection 2014 in more detail. 

The more immediate issue is whether to apply for fixed protection 2014, with action required before 5 April 2014.

Individuals likely to have a fund value of less than £1.25m at 5 April 2014, and where there is a risk that their fund may exceed this figure at a relevant benefit crystallisation event, should consider applying for FP14 before the dead-line unless they have protection under a previous regime.

Those with a fund value greater than £1.25m at 5 April 2014 and who have no other protection should also consider applying for fixed protection 2014 before the deadline. This will ensure that the lifetime allowance test will be based on at least £1.5m at the relevant BCE.

In each case, however, this prevents them from any further accrual or contributing to their pension plans after 5 April 2014. If they do so, they will lose the protection.

Opting out of auto-enrolment is essential for those who elect for fixed or enhanced protection. The challenge for advisers and employers will be how to manage this within the constraints of legislation. 

No one wants to pay more tax than necessary so those considering fixed protection should weigh up whether exceeding the allowance is as bad as it appears. 

Mark Pearson is business development director at Origen Financial Services

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