Pensions: 4,000 savers to be hit by fixed protection rule

AJ Bell has warned nearly 4,000 savers could be hit by a rule preventing people applying for fixed protection against contribution limits.

From 6 April 2012 the lifetime allowance on pension contribution drops from £1.8 million to £1.5 million. Although fixed protection allows individuals to protect themselves from this drop they cannot benefit from this if they already have enhanced or primary protection.

Enhanced protection shelters pension rights built up before 6 April 2006 from the lifetime allowance charge. Those with enhanced protection can continue to grow their pension to £1.8 million but are only entitled to a tax free lump sum based on the £1.5 million limit.

A Freedom of Information request to HM Revenue & Customs by Sipp provider AJ Bell has shown 3,913 individuals hold primary protection. It said up to 935 were at ‘particular risk’ of being worse off because their level of protection was based on 6 April 2006 pension benefits.

Gareth James, technical marketing manager at A J Bell, said: ‘We, along with many in the pension industry, raised the lump sum issue with HMRC when the legislation was first released. It will have made many of those with existing protection worse off, and left no escape route for those with primary protection.’

Those with fixed protection continue to benefit from the £1.8 million lifetime allowance and will be able to receive 25% of that, £450,000, as a tax-free lump sum. From 6 April 2012 the maximum lump sum will drop to £375,000.

James said: ‘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.’