High-paid public sector workers are likely to be the main beneficiaries of new “individual” pension protection rules, according to industry experts.
Last week, HMRC published details of protections it wants to put in place for people affected by the Government’s decision to cut the lifetime allowance for tax-free pension saving from £1.5m to £1.25m from April 2014.
The Revenue plans to introduce two new protection regimes – fixed protection and individual protection – to ease the transition to the new savings limit.
The proposed fixed protection rules will allow individuals to lock-in to a lifetime allowance of £1.5m, provided they do not make any further pension contributions. Investors will need to apply for the new protection before 6 April 2014.
Under the individual protection regime, savers will be able to apply for a personalised lifetime allowance, up to a maximum of £1.5m, based on the value of their pension pot at 5 April 2014. Investors will have three years to apply for individual protection from 6 April 2014.
Anyone who takes out individual protection will still be able to contribute to their pension. However, if their pension fund is worth more than the amount they locked into at 5 April 2014 when they crystallise, the excess will be subject to lifetime allowance charges of up to 55 per cent.
Aviva corporate benefits head of policy John Lawson says: “If you are in a money purchase scheme then every additional pound you pay in will be taxed at 55 per cent, presuming the value of your pot doesn’t fall significantly during that period.
“In most situations in the private sector you would not want to continue accruing benefit because, if you have got a pension pot worth over £1.25m, you will be a senior employee and you can probably get your employer to offer a cash alternative to the pension should you leave the scheme.
“A public sector employer, on the other hand, will not offer you a cash alternative and because it’s a DB scheme the contribution from your employer could be worth as much as 30 per cent of your income.
“So in that situation opting out of the scheme is less attractive because even though the tax is high, so is the benefit you are accruing.”
A J Bell technical resources manager Gareth James says: “It is true to say that high-earning public sector workers will be more likely to benefit from individual protection than private sector workers.
“There is generally less flexibility in private sector packages than public sector. Individual protection allows them to continue building up pension, albeit subject to a tax charge, rather than getting nothing at all.”