Suffolk Life: Fixed protection may be suitable for mid-drawdown clients

Advisers should consider recommending fixed protection to clients who have already started drawing their pension pot, SIPP provider Suffolk Life said.

Her Majesty's Revenue and Customs (HMRC) opened applications for fixed protection in August. Applications must be completed before April 2012.

Suffolk Life analysts have pointed out the protection, which currently shields pension pots from punitive tax charges up to £1.8m provided investors stop making contributions, is not just for clients who have yet to crystalise any of their fund.

There is more than one test of a pension pot against the lifetime allowance (LTA), the provider warned.

First, the fund is tested against the LTA when the client enters drawdown and takes their tax free lump sum, which uses up a percentage of their LTA.

Then, when the client buys an annuity or there is another benefit crystalisation event (BCE), there will be another LTA test.

At this point, the growth on the fund since the first BCE is tested against the remaining unused percentage of the LTA.

From April 2012, the government is reducing the LTA to £1.5m.

Claire Brooks, pensions technical manager at Suffolk Life (pictured), said: "For those at or near the LTA when crystallising into drawdown, there is always the chance they may exceed their percentage of unused LTA.

"This is exacerbated by the reducing LTA. Fixed protection could be the answer for those eligible to apply."

Greg Kingston, head of marketing at Suffolk Life, said: "With the market volatility that has almost become the norm over the past couple of years some investors could easily be caught out by this."

Matthew Stephens, head of product, sales and technical at the Prudential, said: "IFAs need to get round all of their clients and decide whether they need fixed protection as soon as they can. Applying in January or February will be too late."