Are you near the lifetime limit on pensions? Don’t miss the deadline for fixed protection

23rd January 2014

With just over two months to go before the reduction of the pension lifetime allowance (LTA), experts are urging savers to ensure they have properly safe-guarded their nest eggs.

From of 6 April 2014,  the LTA – the limit want you can save in a pension wrapper before incurring hefty tax charges – reduces from £1.5m to £1.25m, the second reduction in three years.

However pension savers can take out what is called fixed protection, which can shield them from the penalty.

Fraser Smart of pension advisers Buck Consultants says: “Fixed Protection 2014 (FP14) can provide affected individuals with significant protection from tax charges, both at death and on retirement.  Individuals can fix their LTA at £1.5m but they have to do so by submitting an application to HMRC before 5 April 2014.”

The decision on whether or not to apply for FP14 is essentially a personal matter for individual employees, and employers may want to check affected employees apply on time to ‘catch the FP14 bus’.  “They also might want to ensure that having caught the bus they do not inadvertently get off at the wrong stop,” adds Smart.

He adds: “Individuals with FP14 can lose it if further contributions are paid into a pension arrangement on their behalf. Bizarrely this could happen when an employer automatically enrols them into a pension scheme, under its automatic enrolment duties, if the individual does not opt out quickly enough.

“It could also happen if the individual joined a new registered group life assurance scheme.  While life assurance cover can usually continue to be provided in a member’s existing scheme, members with FP14 would usually lose their protected status should they join, or transfer to another registered scheme.”

There are ways however of tackling these issues. Options include changing the terms and conditions of the current scheme, and potentially establishing life assurance arrangements that fall outside of LTA coverage. However, employers do need to be aware of the pitfalls.  For example, an employer closing its defined benefit scheme could move its life cover, blissfully unaware that a member with fixed protection has just been taken off the ‘bus’.


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