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Options for pension pots greater than £1.5m

This article is part of
Guide to Pensions Lifetime Allowance

Individuals can apply for fixed protection 2014, which would fix their lifetime allowance at the current level of £1.5m provided no further benefits are accrued.

Individuals who already have primary or enhanced protection or fixed protection 2012 cannot apply for this new form of fixed protection.

There is a further protection of the lifetime allowance, known as individual protection 2014 (IP14). This is currently being consulted on and is expected to be legislated in the Finance Act 2014, which is not likely to be finalised until the summer of 2014.

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Deciding whether to have individual or fixed protection should be based on individual circumstances. An important difference is that while contributions can continue into the pension under the proposals for individual protection, with fixed protection the individual must stop accuring benefits.

If your client is receiving a contribution from their employer, Ian Price, divisional director of pensions and consultancy at St James’s Place Wealth Management, says you need to establish now if the employer will compensate them for not being a member of the pension scheme any longer.

If the client is in a defined contribution, or a money purchase scheme, Mr Price says this is a lot easier because the contribution for each individual is known. If the employer is contributing say £40,000 per year into the pension they can instead pay this as a salary supplement and the value of the remuneration package remains the same.

If, however, the client is a member of a final salary scheme, then Mr Price warns working out what the employer should pay in order to offset not being a member of the scheme is complicated as the employer’s cost is based on the whole membership.

He says: “On a general note unless you are very close to retirement, it is unlikely that the employer will offer a sufficient increase in salary to compensate for the loss of benefit, even if you potentially pay 55 per cent tax on the benefits at retirement.”

Deciding whether to have individual or fixed protection should be based on individual circumstances, Mr Price says.

Timing is a key consideration, according to Martin Tilley, director of technical services at Dentons. Advisers should consider when benefits might be most tax efficiently drawn and to consider these with other personal income.

Investment strategy is another important consideration.

Mr Tilley says: “An aggressive investment approach may yield positive returns that are taxable but might also result in negative returns taking the client beneath the lifetime allowance and thus impacting the level of pension commencement lump sum (PCLS) when drawn.”

In spite of the potential tax charge, Mike Morrison, head of platform marketing of AJ Bell, says some individuals may decide it makes sense to continue funding their pension and pay the tax, particularly if the contributions or accrual are principally employer-funded and the employer is unable/unwilling to pay the remuneration in any other way.