Where does the new pension cap figure in Sir Fred's payout?

I have so far remained silent on the debate over the £705,000-a-year pension awarded to Sir Fred Goodwin by RBS because I am confused about several issues.

Firstly, I find it difficult to understand how the massive increase in his pension – which results from him being granted his full pension entitlement at least ten years early – was not immediately subject to the Lifetime Allowance Charge (explained below), which can apply at up to 55% depending how benefits are taken. Secondly, I cannot see how any degree of governmental posturing could do anything about it, short of introducing retrospective legislation that would either be so specific as to breach Sir Fred Goodwin’s human rights, or so general as to affect us all.

Not that this government is scared of breaching the convention of avoiding retrospective legislation (i.e. a new act of parliament that applies to events already in the past) as evidenced by the impending introduction of car vehicle excise duty that will apply based on car purchase decisions made a much as 8 years earlier, as a way of influencing future purchasing decisions.

What is the Lifetime Allowance Charge?
Pension watchers will know that, when the new 'pension simplification' regime was introduced in April 2006, a cap was imposed on the size of pension funds permissible, aka the lifetime allowance. It was £1.5 million then and is now £1.65 million, but soon (6th April) rises to £1.75 million. Anyone with a fund in excess of this will pay a Lifetime Allowance Charge of 25% (on top of the income tax due) on any income, or 55% on any tax free cash, taken on the balance.

Recognising that this would adversely affect some people, two forms of Protection were introduced. Those with pension funds already in excess of the initial lifetime allowance could apply for Primary protection, which would effectively increase their Personal Lifetime Allowance (based on their actual fund as at 6th April 2006) at the same rate as the general lifetime allowance. This gives some protection against the charge.

Enhanced protection was available to anyone, whatever the size of their pension fund, offering total protection against the Lifetime Allowance Charge, provided that no further pension contributions were made – ever. In the case of defined benefit schemes like Sir Fred Goodwin’s, contributions would be deemed to occur if the pension increases at a rate faster than 5% pa (or, where it exceeds this, in line with RPI inflation) or actual benefits calculated at current earnings on 5 April 2006 (subject to a cap to the permitted increases in earnings to avoid abuse of the rules).

So why the confusion?
What I could not see was why the restriction did not appear to apply to Sir Fred Goodwin’s pension. It now appears, although I still find it hard to credit, that simply allowing him to retire early on full pension (which pension trustees can do at their discretion) did not apparently breach the rules that allow him to avoid the Lifetime Allowance Charge on at least that part of his pension relating to the immediate payment.

How does this affect us?
There is a lesson in this for us all. If you have a large pension scheme and have not already applied for Primary protection, or any size of scheme and have not yet applied for Enhanced protection, you have only until Friday 3rd April to do so. Even then, it can take up to six weeks to register, so there is much greater urgency (and you can always de-register later).

Bruce Janman is principal of Robert Bruce Associates, Northants-based financial advisers that specialise in Retirement & Investment Planning. They can be found at www.rbaifa.co.uk/blog.