Fixed protection for pension savings

From 6 April 2012, the lifetime allowance (LTA) for pension savings, currently £1.8million, will be reduced to £1.5million. Although legislation still allows for future increases to the LTA, most commentators believe this won’t happen for quite some time.

Benefits above the LTA incur a tax charge of 55% if paid as a lump sum or 25% if paid as an income, which itself is then taxable under PAYE rules. It’s important to remember that the LTA tax charge aims to recover the tax relief received during the accumulation period, leading to a theoretical tax-neutral position for benefits in excess of the LTA.

Broadly speaking, tax neutrality places excess pension saving on a par with other non-pension forms of saving. However, even tax-neutral benefits in a registered pension scheme still offer other valuable features such as exemption from inheritance tax and ring-fencing from bankruptcy proceedings. Many occupational pension schemes also offer or sit alongside other important benefits, like group death-in-service and disability schemes.

Nevertheless, some people may view the reduction in LTA as a blow to their plans. However, this blow may be softened if they register for fixed protection.

Essentially, fixed protection could help anyone who believes that, when they come to crystallise their pension arrangements after 6 April 2012, the LTA won’t have increased sufficiently above £1.5million to cover the projected value of the benefits.

So it doesn’t just have an impact on people who pension arrangements are already around £1.5million. It may also affect those who are building up pension arrangements that are projected to go beyond that level in the future when they take benefits. However, the more distant that date is, the more difficult it is to determine whether fixed protection conveys any benefit.

What is fixed protection?

The protection is limited; a retained LTA of £1.8million but only if the individual accepts that they can have no further benefit accrual. This means stopping all contributions to a money purchase pension plan after 5 April 2012. Final salary accrual may continue but is limited to CPI increases (or other increases covered in the scheme rules by 9 December 2010) on the pension accrued at the start of the year.

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