HMRC has finally made public the full details of what to expect when the latest reforms to transitional protection come into effect as of April 6 this year. The reduction of lifetime allowance to £1 million will have wide-reaching effects for many savers, though others will find themselves in a position where no action needs to be taken.
Fixed Protection 2016 gives savers the opportunity to hold onto a £1.25 million lifetime allowance as of April 6, on the condition that benefit accrual stops. Individual Protection 2016 is an option available to those withtotalling £1 million or higher and without primary protection as of April 5. This option offers the saver personalised lifetime allowance up to a maximum of £1.25 million, allowing benefit accrual to carry on.
For clients with pensions valued below £1 million, the options they have are Fixed Protection 2016 or no protection. In instances where employer contributions are not being made, the decision should be made in accordance with future benefits projections up to the intended date of the saver’s. Assumed growth rates and the time to retirement will both impact which represents the most appropriate decision.
For example, if a saver has £700,000 locked away and intends to retire in five years, a 5% growth rate would mean their total fund upon retirement would be around £893,000. As there may be scope for further contributions, fixed protection is not required.
By contrast, is the same saver didn’t intend to retire for 10 years, this would mean that their total funds upon retirement would reach £1.14 million and Fixed Protection 2016 would represent a beneficial option. Making the right decision will be easier for those who are relatively close to retirement, as this will make it easier to project total retirement savings at the time the saver stops working.
In instances where savers have more than £1.25 million already in their retirement funds, the choice is relatively simple. If savings total between £1 million and £1.25 million however, things become a little trickier and the saver’s situation requites deeper investigation and consideration. Things are once again made easier however if no employer contributions are being made, or if the individual is close to retirement.
HMRC also confirmed the details of new online self-service forscheme members, while stating that application deadlines for the new protections will not apply.
“There will be no application deadline for these protections. However, individuals will need to apply for protection before they take their benefits as they will need the HMRC reference number if they want to rely on the protection,” read the HMRC clarification.
“We are introducing a new online self-service for pension scheme members to apply for protection and this service will be available for members to use from July 2016. Members will no longer receive a lifetime allowance protection certificate, instead once they have successfully applied for protection the online service will provide them with a reference number which they will need to keep.”
Independent financial advice should be sought by anyone unsure as to which of the available options suits their own circumstances best – ideally at the earliest possible opportunity.