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Combining fixed and individual protection can secure value of larger pension pots


The new rules on individual pension protection announced last week allow people to apply for both fixed protection and individual protection. Anyone applying for fixed protection may benefit by also applying for individual protection, as it could provide valuable contingency and help ensure future flexibility, says Skandia.

Fixed protection allows someone to protect their pension fund up to the value of GBP1.5m regardless of its current value. While people with sizeable pension funds will be attracted to this option, they will need to consider the downside that no further contributions can be made to the scheme.
There is an exception to this; people in a final salary pension scheme who apply for fixed protection do have the potential to stay in the scheme, provided the capital value of any added benefit does not exceed the annual rate of increase in the CPI (Consumer Prices Index), or a scheme specific formula where that is applicable.
If the added benefit exceeds that allowed under the relevant formula, then fixed protection will be lost, and the client will no longer have a Lifetime Allowance of GBP1.5m. However, applying for individual protection could offer a safety net in such situations.
If someone has a pension fund valued between GBP1.25m and GBP1.5m by the end of this tax year, they can apply for individual protection. Applying for individual protection as well as fixed protection means that clients will build a level of contingency into their pension savings that will avoid a Lifetime Allowance tax charge should the fixed protection become void.
It can also provide an element of future flexibility should someone decide to start contributing towards their pension again. This could happen due to a change in circumstances or a fall in the investment market. Making additional contributions can make the fixed protection invalid, so the individual protection would be able to compensate for some of the lost protection.
Adrian Walker (pictured), Skandia’s pension expert, says: “Anyone making the decision to apply for fixed protection should consider also applying for individual protection if they have between GBP1.25m and GBP1.5m in their pension savings by the end of this tax year. It will provide a guaranteed underpin to the level of savings that will not be subject to an additional Lifetime Allowance tax charge should something happen to void the fixed protection.  Individual protection may not provide the equivalent level of protection offered by the fixed protection route but can be a valuable safety net, especially where the value of those savings is well above the GBP1.25m lower threshold.”

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