Enhanced protection could be invalidated by auto-enrolment

People who have registered for enhanced protection could find it invalidated by 2012 auto-enrolment regulations and face "penal" charges, First Actuarial says.

The actuarial consultancy said draft regulations published by the department for work and pensions failed to clarify the issues facing those who have taken steps to protect their pension savings against "penal lifetime allowance charges".

Director Alan Smith says: "Under the draft rules, employees would first be automatically enrolled into a scheme and only then would have the choice of opting out. But individuals who have registered for enhanced protection will lose this if they build up benefits in a new pension arrangement such as personal accounts.

"The loss of enhanced protection could cost individuals tens of thousands of pounds as some of their pension savings suffer a 55% tax charge."

Smith says the DWP needs to make it clear how those with enhanced protection will be treated.

He adds: "One idea would be to exempt individuals with enhanced protection from auto-enrolment altogether. After all, they are not exactly the target market for personal accounts.

"Alternatively, benefits built up in personal accounts could be disregarded as far as enhanced protection is concerned."

Smith warned another potential consequence is that even if individuals opt out of personal accounts in 2012 and are allowed to retain enhanced protection - they risk losing it when they are auto enrolled again in 2015, 2018, 2021 and so on.

"The key point is that this is an area of uncertainty and the government needs to confirm in advance exactly what they expect these individuals and their employers to do."