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Retirement Strategy: When to apply for fixed or personal protection

Fixed and individual protection is being offered to clients close to or set to exceed the lifetime allowance mark and advisers are warned to act now

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With the lifetime allowance reducing to £1.25m from the start of next tax year, what can clients who are close to or exceed that level do to ensure they are not hit with an unexpected tax bill?

The Government has provided clients whose pension savings may be threatened by the reduction of the lifetime allowane with the ability to register the value of their pot for two types of protection, fixed protection 2014 and individual protection.

Fixed protection 2014 is available for clients with savings up to the value of £1.5m regardless of the current value of those savings, meaning any future growth (up to the value of £1.5m) is safeguarded. However, once the value is protected no further contributions can be made (with some exceptions for those in final salary pension schemes).

Individual protection is available to clients with pension savings worth at least £1.25mn by the end of this tax year and allows clients to continue to contribute to their pension. This can be of considerable value to some pension savers whose situation means they need to continue making contributions.

However, registration for individual protection cannot take place until the legislation is enacted in next year’s Finance Bill. Indications are that the earliest time at which registration can start will be August 2014 with a three year period from 6 April 2014 in which to sign up.

Advisers should not be lulled into thinking there is no urgency in addressing this issue with clients.

Estimates suggest that 60,000 individuals will apply for one or both forms of protection but importantly a further 50,000 individuals who had previously registered for either enhanced protection or fixed protection, may now register for individual protection to provide a lifetime allowance safety net should the other forms of protection be lost.

The following table shows the way in which a client’s existing pension savings need to be valued for the purposes of determining eligibility for individual protection and the value that will ultimately be protected.

Type of Pension saving Basis of valuation as at 5 April 2014

Uncrystallised money purchase funds

Face value of funds

Uncrystallised defined benefit pension

20 times pension value, plus face value of any additional pension commencement lump sum

Pre 6/4/2006 Crystallised pension rights where no benefit crystallisation has occurred since 6 April 2006

25 times the pension in payment. In the case of capped drawdown funds, the pension figure will be the maximum annual income available

Value of benefits crystallised post 6 April 2006

Monetary value of crystallisation discounted by factor of current LTA (£1.5m)/ LTA applying at time of the crystallisation event.

A case study illustrates some of the potential Individual Protection eligibility pitfalls that can arise.

Brian has £300,000 of uncrystallised pension savings and is still working for the company that he started in 2012. Additionally, in June 2011 he received a scheme pension of £45,000 with a commencement lump sum of £150,000.

When the scheme pension was taken, Brian used up 58.33 per cent of the then lifetime allowance of £1.8m.The value of the event was £1,050,000 (i.e.  20 x £45,000 + £150,000).

At face value it would appear that Brian is eligible for individual protection if his uncrystallised savings are added to that figure.

However, the monetary value of the crystallised benefits (for the purposes of individual protection) is discounted by the lifetime allowance factor of £1.5m/£1.8m, giving a value of £875,000. When Brian’s other savings are added to that figure his total benefit value is £1.175m and without further funding Brian will not be eligible for individual protection.

Before the end of this tax year, it may be possible for additional funding to be made to:

  • Fully use Brian’s annual allowance for the 2013/14 tax year
  • Fund any unused annual allowances from pension input periods that ended in the three preceding tax years
  • Advance fund the 2014/15 Annual Allowance of £40,000.

Such funding could ensure that Brian can apply for individual protection by boosting the overall value of his savings in this tax year to the £1.25m threshold. Similar planning could be for eligible clients to boost the value of the savings further (if they are currently worth less than £1.5 million) as a means of increasing the protection value available to them.

Clients in this market segment will need to have the value of their pension savings reviewed before the tax year end, so that any planning opportunities to create eligibility where none exists at present, or to maximise the level of Individual protection available can be discussed.

Adrian Walker is pensions expert at Skandia

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