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New individual protection rules provide greater flexibility for pension savers


New rules announced by HMRC provide people with large pension savings the flexibility to continue to receive valuable employer contributions to their pension. 

Higher and additional rate tax payers in-particular may be better off receiving these pension contributions rather than receiving the benefit as additional salary, even though the future value of the additional pension contributions may exceed the lifetime allowance and be subject to a 55 per cent tax charge if taken as a lump sum in retirement.
Not being able to make money purchase pension contributions under fixed protection means there could be serious consequences in applying this form of protection. For some, ceasing to contribute to a pension scheme may mean they lose any lump sum death benefit, as well as any future employer contributions.
Even if the employer agrees to pay the pension contribution to the employee as part of their salary instead, the tax and NI the employee will pay on the extra salary will leave them with significantly less to be able to personally invest outside of pension savings.  This could mean they end up in a worse position than if they had continued active membership of their pension scheme and suffered the 55 per cent tax on the lifetime allowance (LTA) excess.
Adrian Walker, Skandia’s pension expert, says: “The new individual protection offers an ideal underpin of security for those with at least GBP1.25m in their pension fund, without the downside of sacrificing pension contributions in the future. Fixed protection is a valuable option for those with significant savings to protect, but there are other key considerations that people will need to take into account, including the loss of employer contributions and possible loss of death in service benefits. If these are real issues, then people really need to think about what they are sacrificing, and whether they outweigh the additional 55 per cent tax liability that may be payable in the future.” 

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