Personal Pension  

Play it by the rules

One of the stated aims of the new pension landscape post A-day (‘pensions simplification’) was to get the multiple regimes that then existed down to just one pension regime.

Great in theory but in practice it was never going to be that easy. The government’s desire not to retrospectively penalise people meant that rules to protect existing funds would be needed, and so the idea of ‘protection’ was devised.

Now, with the further proposed changes to the lifetime allowance scheduled for 2014, there will be five different protection regimes, with the ability in some circumstances for them to double up.

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As the 2006 rules introduced the idea of a lifetime allowance, the protection rules allowed the chance to protect values above the prescribed amount. Before we continue, let us just have a quick reminder of the rules as they stand.

Primary protection gives you an enhanced LTA, based on future increases to the standard LTA. It means you can have more pension savings without paying the LTA charge, while still being able to pay contributions. You could only elect for primary protection if you had built up pension savings of more than £1.5m on 5 April 2006, and the application needed to have been made by 5 April 2009.

Individuals who applied for primary protection should have received a certificate from HM Revenue & Customs showing their LTA enhancement factor.

There was also the option of applying for enhanced protection to avoid paying the LTA charge, but a number of conditions came with enhanced protection.

It was possible to apply for enhanced protection even if the capital value of pension benefits was below the LTA at 5 April 2006.

It was designed for those members who believed that their pension fund, or growth in its value, would mean that it would be worth more than the LTA. If a person applied for enhanced protection they normally could not pay further pension contributions to a registered pension scheme or accrue benefits under a defined benefit scheme.

It is possible to lose or give up enhanced protection. If this happens then HMRC must be notified.

Those who applied for primary and enhanced protection will have a certificate showing that they have enhanced protection. Enhanced protection has precedence over primary protection. This means that, following any loss or revocation, HMRC will send a primary protection certificate.

The LTA gradually increased to £1.8m by 2010/2011 but from 6 April 2012 it was reduced to £1.5m. Fixed protection allowed individuals to retain an LTA of £1.8m so that there would be no LTA charge for pensions up to this level. Fixed protection 2012 has similar conditions to enhanced protection – namely the requirement for cessation of contributions and accrual. Registration for this protection had to be made prior to 6 April 2012. It was not possible to have fixed protection in addition to either primary or enhanced protection.

From 6 April 2014 the LTA will be reduced to £1.25m and, surprise, surprise, a couple of new forms of protection are on the cards.