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Mark Pearson: Picking the right pension protection

Mark Pearson MM blog

The lifetime allowance, as we know, is to reduce with effect from 6 April 2014 from £1.5m to £1.25m.

Once again, there is to be the opportunity for people who have not previously secured protection against earlier changes to limits, to elect for it under the “Fixed Protection 2014” basis.

However, the Government is also consulting on what it has now called individual protection, for individuals with UK tax relieved pension rights of more than £1.25m or who think they may have rights in excess of £1.25m by the time they take their pension benefits.

This also includes those in drawdown pensions who may need protection when their residual fund is tested against the allowance at age 75.
Once again, those who have accumulated funds over a number of years are faced with having to make a decision. Do they elect for fixed or individual protection and what are the implications?

Fixed protection 2014 will operate on the same basis as the previous version but the basis for individual protection is subject to consultation and the precise details have yet to be provided.

They will be announced later this year but this creates a degree of uncertainty for some and adds to the time pressure on decision making.

As was the case in 2012, individuals will have to make an election for protection on or before 5 April 2014, with no exceptions and the election form is not likely to be available until after the Finance Bill 2013 has passed into law.

Fixed protection can be lost if the relevant conditions are not complied with. Broadly, this means:
    •    Individuals in defined contribution pension schemes must ensure that no further pension contributions are received by the scheme on or after 6 April 2014
    •    Individuals in a defined benefits scheme must not accrue further benefits above the relevant percentage from this date. The relevant percentage will normally be either the annual rate specified in scheme rules as of 11 December 2012 for the revaluation of accrued rights, or CPI (if no rate is specified), although certain statutory increases will be excluded from the test

It is proposed that individual protection will entitle individuals to a lifetime allowance of the greater of the value of their pension rights on 5 April 2014, up to an overall maximum of £1.5m or the standard lifetime allowance.

Unlike fixed protection 2014, individuals who elect for and obtain this protection would not be subject to any restrictions on future contributions or accruing further benefits.

However, when benefits are crystallised, any fund in excess of their protected allowance will be subject to the lifetime allowance charge.

Despite some uncertainty, advisers need to make clients aware of the change and the options available at the earliest opportunity.

This will particularly include clients who are close to crystallising funds, who may need advice as to whether to bring that forward or apply for protection and which type to apply for.

Mark Pearson is director of business development at Origen Financial Services

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