John Lawson, Aviva's Head of Policy, Pensions and Investments, comments on HM Revenue & Custom's proposals for a new ‘individual' protection regime to accompany the reduction in the pensions lifetime allowance from April 6, 2014.
"As expected, a new individual protection regime is to be introduced for those caught by the new reduced lifetime allowance of £1.25m coming into effect next April.
People who have more than £1.25m in pension rights on 5th April 2014 will be allowed to claim individual protection against the new reduced lifetime allowance based on the value of their pension rights at this date and continue accruing pension. The maximum individual lifetime allowance will be £1.5m, so someone with pensions worth say £1.6m will not be able to claim protection against the full amount.
This new option will be introduced alongside a new form of protection called fixed protection 2014, giving people affected by the changes two options. The benefit of the fixed protection 2014 option is that the claimant will potentially get a higher lifetime allowance of £1.5 million. The downside is that they will be unable to build up any further pension entitlement after April 2014.
To claim individual protection, the claimant will have to know what all of their pensions are worth on 5th April 2014. Most people won't know exactly how much their pensions are worth until well after the deadline. However, they will have three years to claim individual protection.
This raises an important dilemma for advisers in the build up to the change. If they recommend that their client opts for individual protection, and they continue accruing benefits, they cannot then subsequently use fixed protection 2014, as they will have accrued pension benefits after 6th April 2014.
So, if they decide to claim fixed protection and individual protection they may have to opt out of accrual under their pension scheme. It may then be difficult to re-start accrual under the scheme, particularly if it is defined benefit, should they subsequently decide that individual protection is the better option.
Fixed Protection 2014 will operate in the same way as Fixed Protection 2012 and will only be lost if benefit accrual occurs. For money purchase schemes, this rules out further contributions.
But those in DB schemes may be able to have their cake and eat it. In these schemes, benefit accrual only occurs if the benefit increases by more than the ‘relevant percentage'. The ‘relevant percentage' increases apply each tax year and will normally be CPI unless a higher revaluation rate was written into the scheme rules on 11th December 2012.
Depending upon CPI for the previous September, an additional 60th, or 80th plus 3/80ths cash, may be worth less than CPI, particularly if the individual's pensionable pay is frozen. For example an increase in pension from 38/60ths to 39/60ths increases the pension benefit by 2.6%. Whilst that is higher than the current CPI of 2.4%, the rate of CPI is fluctuating and has been as high as 2.8% as recently as March 2013.
The September 2013 CPI will set the maximum ‘relevant percentage' for 2014/15 tax year, so advisers should look out for publication of this figure as it may allow some people to keep accruing benefits in a DB scheme AND elect for Fixed Protection.
Those close to retirement and on a frozen pensionable pay may actually be best opting out of the scheme because the revaluation percentage for deferred members may actually result in their pension going up faster than remaining an active member. In this case, they would also save on having to pay contributions into the scheme.
The introduction of these new protections looks like another opportunity for advisers with high net worth pension clients to help them make some difficult choices."
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