Following a request by provider AJ Bell, Freedom of Information data released today revealed a total of 18,574 individuals are at risk of losing protection of their pension savings once auto-enrolment rules come into effect from October 2012.
Individuals lose enhanced protection when contributions are made to pension schemes, AJ Bell warned. It said savers with enhanced protection are prevented from facing high tax charges if their pension benefits exceed the lifetime allowance when they take benefits.
Every three years individuals would need to opt-out of pension schemes as per the requirements of the new auto-enrolment process, which increases the likelihood of contributions being paid inadvertently for those holding enhanced protection.
“Anyone holding enhanced protection needs to take measures to make absolutely certain they opt out of being auto-enrolled as the financial consequences could be catastrophic,” said Billy Mackay, marketing director at AJ Bell, adding that there’s an element of personal responsibility involved.
The government should take adequate measures to prevent significant losses of those holding enhanced protection, since the number of individuals at risk is high, advised Mr. Mackay.
“Exempting those with enhanced protection from being subject to auto-enrolment is an option, but many individuals may not want their employer to know that they hold this protection. An alternative would be to allow enhanced protection to be retained provided contributions do not breach a certain threshold, say, £1000,” he argued.
“Very few of those holding enhanced protection will make contributions of up to £1,000 as the incentive is not there, so the impact on the Treasury would be minimal. Conversely the impact of this policy for anyone who holds enhanced protection and inadvertently allows themselves to be auto-enrolled could be significant,” he added.