Protecting your options

Mike Morrison goes through the protection options for those clients likely to exceed the new lifetime allowance.

The concepts of annual and standard lifetime allowances (SLA) have been with us since A-Day and it was hoped that the levels at which they were set would progress upwards appropriately.

Unfortunately, we now know that this is not going to be the case. The annual allowance was amended as from 6 April 2011 and has now become £50,000 per annum.

The SLA will reduce from its current level of £1.8m to £1.5m effective from 6 April 2012.

At A-Day we had primary protection and enhanced protection to protect those people who already had a large pension fund and shortly we will have a new one fixed protection.

Fixed protection is the new form of transitional protection that can be applied for by individuals who do not have enhanced or primary protection. It will protect pension savings of up to £1.8m from a lifetime allowance charge.

There is no requirement to have a fund in excess of the SLA, and this is one of the key planning points.

It will be important to consider today’s pension fund value, the time to retirement and the likely future growth on that fund.

Those who are younger and with either large funds or funds that they think will grow significantly or believe future lifetime allowance increases will be zero or modest, might want to consider protection.

As usual, there are some conditions that need to be met for fixed protection:

• No new contributions may be paid to a money purchase arrangement on or after 6 April 2012

• The amount of benefits that can be accumulated under a defined benefit (DB) scheme after 6 April 2012 will be limited to pretty much just indexation on the accrued benefits with no further accrual. This could mean some people will have to opt out of their DB scheme

• The member cannot set up any new registered scheme on or after 6 April 2012 unless that scheme is solely to receive a transfer of existing benefits. If an individual who has opted out becomes auto-enrolled in a new scheme then they will have to opt out or fixed protection will be lost.

• Any application for fixed protection must be made to Her Majesty’s Revenue & Customs (HMRC) by no later than 5 April 2012.  Once HMRC has accepted the application, it will send the member a certificate confirming the protection.

• If the SLA increases in the future to more than £1.8m, fixed protection will cease and the member’s benefits will become subject to the higher SLA.

Example

Jim Smith is 45 today and wishes to retire at 65, he is married and his wife is currently a non taxpayer.

His pension fund is currently worth £500,000 and consists of a property valued at £400,000 and trustee investments valued at £100,000.

The property is key to the successful running of Jim’s business. The property is leased back to Jim’s business and rental income of £40,000 per annum is payable by the principal employer to the pension scheme.

Jim does not pay a regular contribution into the scheme and he certainly does not want to exceed the SLA and is concerned about the reduction in the SLA to £1.5m.

Even though Jim does not pay any contributions to the scheme, the length of time to retirement and the compounding of the rent (which in effect acts as a contribution) means that with just 1% per annum investment growth there is the probability of exceeding the SLA.

If the lease to the property contains an upward only rent review clause, then the rent will increase.