Should we have more time to prepare for fixed protection?

Andy Zanelli asks whether the deadline for fixed protection needs to be amended

As opposed to a week being a long time in politics I have found, from experience, that eight weeks is not a long time in the world of pensions. This is the timeframe that anyone advising those clients with significant pension funds has to make sure they register for fixed protection. Unlike at A-Day, where there was a significant window after the event to register for either enhanced or primary protection this date is set in stone. Anyone who misses this opportunity has missed the boat and could face some large tax charges in the future.

A good number of articles have been written outlining the need to prompt many clients, some more obvious than others, to take appropriate action. Two recent headlines related to this issue struck a chord with me: the first one was the fact that HMRC has commented that it hasn't received the number of elections for fixed protection it anticipated. On reflection I cannot say I am surprised by this; yet another change for a reasonably small group of clients who in the last few years have had to, potentially, deal with complex implications around enhanced and primary protection, annual allowance, pension input periods, anti-forestalling, reduction in the annual allowance, the reintroduction of a form of carry forward and changing tax rates.

Complexity

As I will illustrate later, when these constant changes build into a complex advice area is it surprising that clients have not registered yet? If we then look at the challenges facing most advisers and their businesses with the many strands of RDR that need to be addressed by the end of the year these are tough times - not just for the economy!

The second one neatly summed up my own thoughts on the issue as Steve Webb, pensions minister, said: "There are areas of pensions' regulation that are burdensome and cumbersome and must be got rid of"¹. The bit I really liked was the reference that said: "...there was a burden on him to not only know all the regulations..." Good luck Steve, as I have been trying for over 20 years!

As an example of how this area is complex and where there is an interaction with the existing legislation consider the following scenario for a client with primary protection:

Primary protected pension commencement lump sum (PCLS) - £550,000
Individual lifetime allowance - £1,900,000
Current fund value - £1,600,000

The client effects a partial transfer of £550,000 to a separate arrangement and takes as a standalone PCLS, leaving a balance fund of £1,050,000 unvested. In this case 28.94% of the current standard lifetime allowance (CLSA) has been taken before April 2012. However, 28.94 % of the CLSA after the 6 April 2012 is £434,100. This leaves £1,465,900 of individual lifetime allowance to offset against any remaining fund when vested. This would create an opportunity for additional funding after the reduction to the level of the lifetime allowance.

As I said earlier, this affects more clients than are immediately obvious. Those with funds not at the lifetime allowance but well invested members of defined benefit schemes with long service and higher salaries and even those with existing enhanced protection from A-Day are examples to bear in mind.

Pulling all of this together I believe there are a couple of key questions that come out of all this. Having been involved with a number of complex cases where there are significant impacts for the client and having spoken to a number of advisers where the full scale of the work involved may not be fully understood. Is it time to be brave and defer the implementation of this for 12 months? A potentially pragmatic solution at a time of unprecedented change and uncertain economic conditions.

The second question I have has really been brought into focus with the situations I am coming across and the comments of Mr Webb himself. Why are we spending so much time, money and effort on imposing an ever more complex cap on pension funds? Is it time to only limit the level of benefits that are paid into pensions, scrap what is effectively a tax on investment return and allow those people with larger funds to draw those benefits. In doing so they may produce other tax revenue through income tax, VAT on purchases, stamp duty and so on. Then we all may be able to get on with getting people to save in the first place.

Andy Zanelli, head of technical sales, AXA Wealth

¹ http://www.ftadviser.com/2012/01/24/pensions/group-pensions/webb-we-must-remove-burdensome-pension-regulation-GRjyYr0X8fWDTEJicTWXaK/article.html