ADVISER
FACTSHEET
Tech Talk
January 2014
Protection Flowchart
With the forthcoming reduction in the standard
lifetime allowance (SLA) and the addition of two
further forms of protection:
• Fixed Protection 2014 (FP14),
• Individual Protection 2014 (IP14),
to the already lengthy protection list, advisers are
likely to be reviewing their client databases to see
what action, if any, needs to be taken.
Tools that facilitate the review are to be welcomed
and the flowchart below attempts to focus on the
key questions in the decision making process; this
is designed to be used before 5 April 2014. It is
worth pointing out that the legislation covering
IP14 is only draft and may be subject to change.
Any change is likely to impact on the flowchart.
For professional advisers only
Although the flowchart concentrates on FP14 and
IP14 it does have a wider application. IP14 can be
dormant with either Enhanced Protection (EP)
or Fixed Protection 2012 (FP12) or FP14 taking
precedence. Because of this and the possibility
that either EP or FP12 can be easily given up, the
flowchart has relevance for individuals with these
forms of protection.
There is uncertainty as to changes in the level of
the SLA in the longer term. Bearing this in mind,
the flowchart should not be relied upon where the
time period for taking benefits extends beyond the
short to medium term.
Also, using the flowchart requires a reasonable
understanding of all the protection options and
their associated conditions.
No action
required
FP14 &
IP14 not an
issue
(para 3*)
No action
required
FP14 &
IP14 not an
issue
(para 2*)
Does individual
have PP or
dormant PP?
Yes
Yes
FP14 &
IP14 not an
issue
(para 1*)
No
Potential for BCE
post 5/4/2014?
No action
required
*The paragraphs referred to above are set out on the next page.
Yes
Will pension rights exceed £1.25m
post 5/4/2014?
Start
No
Flowchart
No
Does individual
have EP or FP12?
No
Yes
FP12/FP14/EP &
IP14 or IP14
(para 4*)
Apply for IP14
Is giving up EP/FP12
advantageous?
Yes
Pension funding
post 5/4/2014?
No
No
Yes
No
Pension rights @
5/4/2014 > £1.25m?
Yes
2
IP14 not an issue
FP12 or FP14 or EP
or No protection
(para 5*)
No further
action
Apply for FP14
Paragraph 1
Paragraph 4
Where it is anticipated that the value of an
individual’s pension rights will never exceed £1.25m,
FP14 and/or IP14 serve no purpose. Therefore both
forms of protection can be discounted.
Where an individual’s pension rights will exceed
£1.25m and Primary Protection is not present
then consideration of FP14 and IP14 is advisable,
especially where a BCE is anticipated before
the SLA reaches the level where either form of
protection becomes superfluous. The language
used in the guidance provided by the Government
hints that the SLA may increase in the future.
This outcome will apply to individuals who are
likely to have no protection in place and their
pension saving to date and in the future will mean
that the value of their pension rights will never
threaten the £1.25m threshold.
It is hoped that individuals who have either
Enhanced, Primary or FP12 do not envisage a
similar outcome. If this is the case, then their
pension planning has not gone as planned and
remedial action may be required.
Paragraph 2
Although it is expected that the value of pension
rights will be in excess of £1.25m, if there is no
further BCE, there is no further test against the
lifetime allowance, and exceeding it is not an issue.
Thus, any form of protection is redundant.
For clarity, it is worth pointing out that in the
case of an individual under age 75, with fully
crystallised rights, with no intention of engaging in
future pension funding, a future BCE may still be a
possibility. For example, where tranches of post 5
April 2006 drawdown remain or where a scheme
pension is increasing during payment. A BCE 3
occurs when a scheme pension increases beyond
both the threshold annual rate and the permitted
margin (see RPSM1104310 for more detail). Note
that a BCE 3 is possible post 75.
Paragraph 3
Neither FP14 nor IP14 is an option where the
individual already holds Primary Protection
including where Primary Protection is dormant
when held in conjunction with Enhanced
Protection.
Where the individual already has either EP or FP12
in place, and their pension fund hasn’t performed
well, then it might be advisable engaging in some
pre 6 April 2014 pension funding to counteract any
shortfall, and opting for FP14 if no further pension
saving is planned beyond 5 April 2014.
If the value of such an individual’s pension rights on
5 April 2014 exceeds £1.25m then applying for IP14
is an obvious course of action.
All possible outcomes are as follows:
• Enhanced Protection and IP14,
• FP12 and IP14,
• FP14 and IP14,
• IP14 only.
Paragraph 5
The issues here are similar to those described
under paragraph 4. However, the difference here is
that although it is expected that the value of the
individual’s pension rights will exceed £1.25m at a
future BCE, their value as at 5 April 2014 will not
exceed £1.25m. Therefore IP14 is not an option.
All possible outcomes are as follows:
• Enhanced protection,
•FP12,
•FP14,
• No protection.
3
Comment
The right tools in the hands of a skilled tradesman
invariably lead to a favourable outcome for all
concerned.
The flowchart is merely a tool. Without good
quality advice the right decisions are unlikely to
be taken. Making the best use of the tax breaks
available through pension savings, as part of a
successful retirement planning strategy, is the
ultimate aim. A note of caution in that the desire
to minimise the lifetime allowance charge should
not be allowed to blinker advisers and their clients
in pursuit of this aim – 45% of something is better
than a 100% of nothing after all.
A holistic approach to retirement planning,
incorporating non-pension aspects, is taken by
many and finding the most tax efficient route to
generate the required retirement income demands
time and a fair bit of detailed analysis. Access to
the appropriate analytical tools makes the analysis
far easier.
Further information
John Dunn
Pension Specialist
Technical Support Unit
Please do not hesitate to contact
the Technical Support Unit with any
further queries on:
0845 600 8651
Pensions Technical Support:
[email protected]
Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance
with our understanding of current law and HM Revenue & Customs practice. You should note however, that James Hay
Partnership cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained
before acting or refraining from acting upon the information given. The law and HM Revenue Customs practice are subject to
change. The tax treatment depends on the individual circumstances of each client.
James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS)
(registered in England number 2601833); James Hay Administration Company Limited (JHAC) (registered in England number 4068398); James Hay Pension Trustees
Limited (JHPT) (registered in England number 1435887); James Hay Wrap Managers Limited (JHWM) (registered in England number 4773695); James Hay Wrap
Nominee Company Limited (JHWNC) (registered in England number 7259308); PAL Trustees Limited (PAL) (registered in England number 1666419); Santhouse
Pensioneer Trustee Company Limited (SPTCL) (registered in England number 1670940); Sarum Trustees Limited (SarumTL) (registered in England number 1003681);
Sealgrove Trustees Limited (STL) (registered in England number 1444964); The IPS Partnership Plc (IPS Plc) (registered in England number 1458445); Union Pension
Trustees Limited (UPT) (registered in England number 2634371) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number 1739546). JHIC
has its registered office at 3rd Floor, 37 Esplanade, St Helier, Jersey, JE2 3QA. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered
office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL, UPT and UPTL have their registered office at Dunn’s
House, St Paul’s Road, Salisbury, SP2 7BF. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and
regulated by the Financial Conduct Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not
regulated by the FCA. Therefore, IPS and IPS Plc are not regulated by the FCA in relation to these schemes or services.(01/14)
www.jameshay.co.uk
JHSTT 03 JAN14 LD
4