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Protection principles

Next year, April 5 will not only mark the end of the tax year and the start of a new cycle of financial planning but will also mark the last date that clients are able to register their pre-A-Day (pre-April 5, 2006) pension funds for enhanced or primary protection. Therefore, with the cut- off point to register for enhanced or primary protection looming, advisers must take action now if their clients are to benefit from these opportunities.

Clients with pre-A-Day pensions can register the A-Day value of those funds for protection to safeguard themselves from paying hefty tax charges if their pension fund grows beyond their available lifetime allowance.

Failure to register for protection could be costly for clients who may be subject to a lifetime allow-ance charge of up to 55 per cent applied to the capital value of their pension fund that exceeds their available lifetime allowance. Clients whose pre-A-Day pension funds exceeded £1.5m can register those funds for either or both enhanced and primary protection.

When both forms of protection are registered, enhanced protection will take precedence. Enhanced protection can be registered for any value of pre-A-Day pension rights. Before clients can register for protection, there are several issues that may need to be resolved.

Depending on the type of scheme in which a client holds their pre-A-Day pension rights, registering for protection can be a time-consuming and arduous task.

Clients with pension commencement lump-sum rights exceeding £375,000 at A-Day can also register their A-Day PCLS for protection. If these clients are or were members of occupational schemes, they may need to get documentation of their A-Day PCLS rights from the scheme administrator. This could involve a series of complex calculations and clients may need to provide detailed pre-A-Day salary history as well as values of any other benefits that were being taken pre-A-Day.

Enhanced protection is only available to clients who started saving into a pension before A-Day and complications exist for clients who contracted out of a registered pension scheme before A-Day. These clients can continue to get National Insurance rebates from the Department for Work and Pensions to that scheme alone, without cancelling enhanced protection.

Registering for protection is not exclusively for clients who held funds above or around the lifetime allowance of £1.5m at April 5, 2006. Clients with smaller pension funds can also benefit from protecting their pension pots against lifetime allowance tax.

When providing advice, it is essential that advisers take a long-term view and consider the potential future value of their client’s pension funds. If the funds could potentially exceed the lifetime allowance, the client may benefit from registering for enhanced protection.

In 2010/11, the lifetime allowance is due to rise to £1.8m but there is no guarantee of that this increase will materialise and clients should plan to protect their funds accordingly.

Clients who are not due to retire in the near future and who have a current pension fund well below the current lifetime allowance may still benefit from protection and should not be overlooked. Long-term investment performance could significantly increase the value of their pension fund in the years leading up to retirement and create a capital value that might exceed a future lifetime allowance.

Registering for enhanced protection now will provide a safeguard for such clients and help plan for any future possibility of a lifetime allowance charge. Clients can revoke enhanced protection in the future by paying further contributions to registered pension schemes to make up any shortfall against a future lifetime allowance.

A key section of the pension market where such a review is essential will be clients who started a phased crystallisation of their retirement benefits before April 6, 2006.

Colin Jelley is head of tax and financial planning at Skandia

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