Personal PensionMay 15 2013

Would your clients benefit from the new fixed protection?

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ByLes Cameron

From April 2014, the pension lifetime allowance will reduce from £1.5m to £1.25m.

When the government reduced the LTA to £1.5m in 2012/2013 it was expected to remain so until 2015/2016. However, this time no timescales were mentioned.

Fixed protection 2014 is being introduced for those affected by the reduction. It essentially works in the same manner as the 2012 version with some key differences:

■ There is a fixed LTA of £1.5m for all Finance Act 2004 purposes.

■ There is no impact on additional lump sum amount calculations so scheme-specific tax-free cash protection is not affected.

■ The relevant percentage for relevant benefit accrual is based on scheme rules at 11 December 2010.

It is not available if you have one of the existing protections, however it is possible – though probably of limited application – to revoke enhanced or fixed protection and apply for the new protection (unless there is dormant primary protection).

Planning will be a particularly individual decision, with no one-size-fits-all answer. The crux of the matter is that having protection means contributions and accrual stop. This leaves a gap in retirement funding and thus decisions are required.

Though there is no one-size-fits-all answer, there can be a one-size-fits-all process as outlined in the table below.

Most clients will be unlikely to achieve this process themselves and, even where they could, there is still the need for advice to help them make the right decision.

On first appearance, if the client values what he gets at step three at the cost determined in step two then he would possibly conclude protection was not for him. However, the relative value against the alternative options is a fundamental part of the equation – all six steps are crucial.

Let us compare A, C and E from case study 1.

C is higher than A at apparently no cost to the individual – a no-brainer perhaps, but this is only half the process. Step five is key as, if the employer is willing to provide an alternate benefit – for example, a higher salary now – the client may value that more than the difference between A and C – for example, a higher salary – so the decision may change.

E is higher than C and the same thought process applies, but now there is a member cost involved. Are the higher benefits worth the cost? Could an alternative strategy return something more valuable with the same outlay?

The exact same principle applies at higher starting points.

Now let us compare B, D and F.