It will be five years to the day that Primary and Enhanced Protection became a relevant planning consideration that Fixed Protection will begin to become a burning issue. There are some significant differences, and it will effect an entirely different tranche of people; but now we have the proposed rules it’s time to start planning!
In fact, today is the first day that I’ve recommended a client opt for fixed protection. This is a full 15 months before the deadline, and before HMRC have even released a Fixed Protection form, but unlike Protection rules in 2006, Fixed Protection must be applied for before 6th April 2012. The rules, and importance of these rules, are elaborated upon below:
First a quick background: From 6th April 2012 the lifetime allowance will fall from £1.8m to £1.5m. The lifetime allowance is most simply defined as the greatest sum that can be accumulated in a money purchase pension without incurring recovery (i.e. tax) charges. Broadly speaking the tax charge is 55% where the excess is paid as a lump sum.
- Anyone can opt for Fixed Protection – there is no requirement to have a fund in excess of the LTA. Therefore those who are young and/or invest in aggressive funds and/or believe future LTA increases will be zero or modest and/or those very close to the LTA might want to consider protection. I’d expect anyone with funds over £1.5m would probably opt for Fixed Protection anyway, of course. Technically someone could revoke their A-Day protection in favour of Fixed Protection – but I struggle to see why this would be benefit (read: extreme care required!)
- In order to apply for Fixed Protection benefit accrual must cease. Whilst individuals have until 5th April 2012 to submit their registration, this means care must be taken over how contributions are timed (for money purchase schemes), and/or reference must be made to the “relevant percentage” for defined benefit schemes (this is a complex point).
- Tax-free lump sums would normally be paid with reference to the Fixed Protection level (or Standard Lifetime allowance if greater), but there would be more complex rules for Protected Pension Commencement Lump Sums (principally from pre-‘A-day’ Occupational Schemes and GMP)
- Fixed Protection could be lost in the future, so care should be taken to not only cease accrual, but over any transfers as specific guidance has been issued over this (beyond the scope of this simple summary)
The rules on Special Annual Allowances, the ability for some individuals to make large contributions (i.e. circa £300,000) in 2010/11, pension input periods, the new £50,000 limit and carry forward rules will potentially have complex interactions for individuals and highlight the need for individual advice. This brief summary should in no way be taken as advice, and is meant to highlight a complex area particularly relevant for those with substantial funds. I believe communication has been poor on this area so far (accepted it’s early days). However action (or inaction) now could have an affect on future options available, so it is important to assess options early.