According to Adrian Walker, retirement planning manager at Old Mutual Wealth, those registered for enhanced protection or fixed protection in 2012 and 2014 with DB entitlements face losing the protection and thus facing tax charges on amounts deemed to be above the lifetime allowance test.
He said this was because to remain eligible for these forms of protection, clients cannot have any further benefit accrual post the date from which the protection applies. Current improved cash equivalent transfer values available to DB members could constitute a relevant benefit accrual.
HM Revenue and Customs has previously provided Old Mutual Wealth with data which indicated that 20,200 individuals registered for enhanced protection and 28,000 individuals for fixed protection in 2012.
Over the long-term the firm told FTAdviser an estimated 360,000 individuals could be affected.
For enhanced protection, there is no upper limit to pension savings that are protected in a DB scheme. Savers who have ‘fixed protection 2012’ are protected up to a lifetime allowance of £1.8m, while ‘fixed protection 2014’ protects savings up to £1.5m.
If protection has been lost, then any savings above the current lifetime allowance of £1.25m would be subject to a charge of 55 per cent on the excess if taken as a lump sum, or 25 per cent if the excess is taken as income and marginal rate taxes are also paid.
Mr Walker said that if the pot does not effectively increase by more than the consumer price index and statutory revaluation, protection would remain in place.
“For defined benefit members there are complex calculations involved in determining whether a relevant benefit accrual has occurred, which in some cases are dependent on scheme provisions.”
Claire Trott, head of technical support at Talbot and Muir, agreed that the possible loss of pension protections of transfers from DB schemes is an area advisers need to consider.
“Enhanced transfer values and the appeal of the pension reforms, including the wider options on death, will lead some to consider a transfer where they may not have done before.
“Relevant benefit accrual and pension protections are a complex area where knowledge of not only the legislation but of the scheme rules can be needed.”
She added that enhanced protection only needs to be tested on transfer or benefit crystallisation, so those are the people who would most likely be caught out and who would be impacted the most with a drop from an unlimited lifetime allowance to £1.25m or even £1m from 2016.
Transfers from defined benefit schemes, among other potential client decisions, have been at the centre of adviser anxietiesin the lead up to pension reforms coming info force next week April, amid concerns many may seek to take advantage of the new access rules and end up worse off.
The Personal Finance Society has told its members to ‘say no’ to insistent clients who ignore recommendations and not help them proceed with their decision.
Mr Walker added that the potential cost of lifetime allowance charges would far outweigh the costs of advice, and that in some cases the value of a client’s DB pot as a proportion of their overall savings may be relatively small.
“Clients considering transfers from such schemes will require advice from advisers with correct level of qualification before any transfer can be implemented [under new FCA rules]. Such analysis should form part of that advice.
“... Ensuring advisers are aware of any registered protection is important, as questions will need to be asked of schemes as to whether the payment of a cash equivalent transfer value will generate a relevant benefit accrual.”
ruth.gillbe@ft.com
