FOI reveals pitfalls of pension protection rules



The Impact of Pension Protection Rules was Revealed by HMRC

The Impact of Pension Protection Rules was Revealed by HMRC

The number of individuals at risk of being worse off has been revealed by pension provider AJ Bell from HM Revenue and Customs under Freedom of Information act.

The lifetime allowance will drop to £1.5 million from the present £1.8 million from 6 April, 2012, while individuals can protect themselves from this drop under fixed protection.

It was further revealed anyone registering for fixed protection will be able to receive a tax-free lump sum of £450,000; 25 percent of the higher lifetime allowance along with the benefit of higher lifetime allowance of £1.8 million.

Savers without any tax free lump sum protection but with primary or enhanced protection can therefore be entitled to a tax-free lump sum of £375,000, which is 25 percent of the reduced lifetime allowance.

Pensioners with enhanced protection have the option of paying a small contribution to their pension scheme to revoke their protection, but investors with primary protection can’t get this option.

AJ Bell said data obtained showed 3,913 savers that hold primary protection do not have lump sum protection.

“We, along with many in the pension industry, raised the lump sum issue with HMRC when the legislation was first released,” said Gareth James, technical marketing manager of AJ Bell.

“It will have made many of those with existing protection worse off, and left no escape route for those with primary protection,” James added.

“We are not expecting HMRC to increase the tax free lump sum payable to those with primary protection but it can easily solve this problem by allowing individuals the option to switch from primary to fixed protection”, he said.

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