City Trustees - part of Mattioli Woods



News and Media

28 November 2014

Pensions Perspective: If I decide to make a contribution, do I stop being protected?

I took out fixed protection 2012 (FP12). However, my fund value is considerably below the current lifetime allowance. Having made large company profits this year, my accountant has suggested making a pension contribution. If I decide to make a contribution do I simply stop being protected? Would anyone actually find out? Should I make the contribution?

In 2012 the introduction of FP12 provided the opportunity to retain a lifetime allowance of £1.8 million. However, as you have noted, protection came at a price with clients who applied for fixed protection being required to cease relevant benefit accruals within a registered pension scheme.

The 'better to have had it and lost it, than never to have had it at all' viewpoint resulted in many clients who were either fully crystallised, or close to retirement or who had no intention or need to make further pension contributions, taking the decision to apply for fixed protection even though their funds were significantly less than the £1.8 million, or even the former £1.5 million, lifetime allowance.

Unlike enhanced protection, there is no provision which allows for fixed protection to be revoked. However, FP12 can be lost if any of the following occurs after 6 April 2012:

  • There is a benefit accrual under a registered pension scheme
  • There is an impermissible transfer from the arrangement
  • A transfer is made that it is not a permitted transfer
  • A new arrangement is made under a registered pension scheme other than in permitted circumstances

The same rules apply to anyone with Fixed Protection 2014 if any one of the above events occurs after 6 April 2014.

Making a pension contribution would be deemed to be a benefit accrual and so your FP12 would be lost.

It is the member's responsibility to notify HM Revenue & Customs that fixed protection no longer applies within 90 days of the loss of protection. If HM Revenue & Customs discovers that a member has not notified them that they can no longer rely on fixed protection within the required 90 days, then a penalty of up to £300 may be issued. Once an initial penalty is issued there is an automatic daily penalty of up to £60 that applies until the required information is provided.

However, while some clients may make a conscious decision to lose FP12 other clients may find themselves inadvertently losing their protection status as a result either of joining a new employer's group life scheme or being auto-enrolled into an employer's pension scheme. The reporting to HM Revenue & Customs still needs to be made as soon as possible.

Electing to lose FP12 is not a cursory decision to take. Consideration needs to be given to the lifetime allowance tests which are carried out at retirement, at age 75 and on death. While your fund value may still be below the current lifetime allowance of £1.25 million, attention needs to be given to potential growth on the fund between now and full crystallisation of the pension funds, and indeed at age 75, as to whether you will breach the lifetime allowance in the future. There is no right answer to the question, 'Should I make the contribution and lose protection?' The decision to contribute and lose protection needs to examine personal, pension and corporate factors. However, clients with funds exceeding £1.25 million may wish to consider also applying for individual protection before April 2017, which would provide some protection up to a maximum of £1.5 million.

City Trustees operates a free technical helpline to support IFAs with pension challenges.
Tel: 0116 240 8731 or email: technicalhelp@citytrustees.co.uk.

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