Lifetime Allowance and Fixed Protection

wygde3

I am looking for some advice on whether to apply for fixed protection or not.

My situation (all GBP)...

Final salary scheme based on 1/54 per year service
Will retire in 4 years time with 34 years 5 months service
Current salary 115,579
No cap on pension provided

This results in a pension on retirement of about 73,745 and hence a pension value of 1,474,908 at the moment.

If I interpret this correctly if I apply for fixed protection the value of the pension pot can increase by the rate of CPI each year without losing the fixed protection status. The only way that the value will increase is by virtue of salary increases.

So am I right in saying that only if my salary increase exceeds CPI in any one year I will lose fixed protection?

Also, what is the disadvantage of applying for fixed protection and then maybe losing it?

Is it worth applying for fixed protection?

Any help/advice gratefully received.

MrChips

Do you work for a building society by any chance? Not many schemes I know with a 1/54 accrual rate.

Re your question, not the answer you're looking for no doubt, but this is the sort of area which calls for professional, individual advice.

Neverland

wygde3 wrote: »

I am looking for some advice on whether to apply for fixed protection or not.

My situation (all GBP)...

Final salary scheme based on 1/54 per year service
Will retire in 4 years time with 34 years 5 months service
Current salary 115,579
No cap on pension provided

This results in a pension on retirement of about 73,745 and hence a pension value of 1,474,908 at the moment.

If I interpret this correctly if I apply for fixed protection the value of the pension pot can increase by the rate of CPI each year without losing the fixed protection status. The only way that the value will increase is by virtue of salary increases.

So am I right in saying that only if my salary increase exceeds CPI in any one year I will lose fixed protection?

Also, what is the disadvantage of applying for fixed protection and then maybe losing it?

Is it worth applying for fixed protection?

Any help/advice gratefully received.

The way it works is your protection is fixed at the higher of:

- £1.8m
- whatever the normal level is when you retire (from next month £1.5m)

There is no guaranteed index linking

If you fix then you can't take any more pension benefits

With final salaries its really complex so you need IFA advice really quick since its only three weeks till the end of the tax year

jamesd

It seems very likely that the increase in years in service from the current thirty and five months will cause you to lose you your fixed protection unless you tell your employer to stop adding years.

Get professional advice.

wygde3

MrChips wrote: »

Do you work for a building society by any chance? Not many schemes I know with a 1/54 accrual rate.

Re your question, not the answer you're looking for no doubt, but this is the sort of area which calls for professional, individual advice.

Oil company.

wygde3

jamesd wrote: »

It seems very likely that the increase in years in service from the current thirty and five months will cause you to lose you your fixed protection unless you tell your employer to stop adding years.

Get professional advice.

My suspicion as well. But is there any down side in fixing and then having to come out.

Why would I stop adding years? Isn't the tax due on the amount above the 1.5 million and so there is still benefit in going above even though that part will be taxed?

Zelazny

wygde3 wrote: »

Final salary scheme based on 1/54 per year service
Will retire in 4 years time with 34 years 5 months service
Current salary 115,579
No cap on pension provided

This results in a pension on retirement of about 73,745 and hence a pension value of 1,474,908 at the moment.

Not quite. The pension value at the moment is based on the benefits accrued to date, i.e. 30 years and 5 months service (assuming you have exactly 4 years to go) - giving benefits of:
(30 + 5/12) x 115579 x 1/54 = £65,102.37 p.a.
Nominal value for LTA purposes: 65102.37 x 20 = £1,302,047.40

wygde3 wrote: »

If I interpret this correctly if I apply for fixed protection the value of the pension pot can increase by the rate of CPI each year without losing the fixed protection status. The only way that the value will increase is by virtue of salary increases.

I've not had to deal with protection personally, but if you're correct about increases being limited to CPI, then your benefits will already increase by 13.28% in the next 4 years just because of the increase to your service. Better hope that you don't get any pay rises...

As stated above, if you're in danger of exceeding the Lifetime Allowance (and it looks like you might be) it's best to see a professional about it. You can search for an IFA on https://www.unbiased.co.uk

jamesd

I don't see a reason to stop adding. But if you will add there also seems to be no point in fixed protection because it'll be lost almost as soon as you start.

Zelazny

wygde3 wrote: »

My suspicion as well. But is there any down side in fixing and then having to come out.

Looking into this a little closer, http://www.hmrc.gov.uk/pensionschemes/lifetime-allowance/savings.htm says that you will lose fixed protection if you accrue benefits. By being an active member of the scheme, you will be accruing benefits, so it looks like a bit of a non-starter.

That said, the rules do have an odd definition of benefit accrual. They define benefit accrual as being an increase in the value of your non-crystallised rights of more than CPI (or a different amount as specified in the scheme rules at some time in 2010) - which means you might be able to do it if:
(a) CPI increases by more than 13.28% in the next 4 years and
(b) your salary increases by less than the increase in CPI divided by 1.1328 over the next 4 years.

How likely that is I can't say, but generally wages increase faster than CPI.

As to downsides? Lots of paperwork to fill out. You would be responsible for telling HMRC if you lost Fixed Protection, and there may be fines for failing to do so in good time. That's all I can think of.

wygde3 wrote: »

Why would I stop adding years? Isn't the tax due on the amount above the 1.5 million and so there is still benefit in going above even though that part will be taxed?

Edited to add: The extra tax for having exceeded the LTA will normally outweigh any income tax savings made by putting the funds into a pension - you'd be better off keeping the money and investing elsewhere. As such, it is likely worth increasing your pension fund to the point that it will reach 1.5m at about the time you retire, and no more. Of course if a sizeable amount of the contribution is from the employer and would be lost if you stopped contributing, the situation may be different.

There are a lot of variables to take into account - hence advising an IFA :-)

wygde3

Zelazny wrote: »

Not quite. The pension value at the moment is based on the benefits accrued to date, i.e. 30 years and 5 months service (assuming you have exactly 4 years to go) - giving benefits of:
(30 + 5/12) x 115579 x 1/54 = £65,102.37 p.a.
Nominal value for LTA purposes: 65102.37 x 20 = £1,302,047.40



I've not had to deal with protection personally, but if you're correct about increases being limited to CPI, then your benefits will already increase by 13.28% in the next 4 years just because of the increase to your service. Better hope that you don't get any pay rises...

As stated above, if you're in danger of exceeding the Lifetime Allowance (and it looks like you might be) it's best to see a professional about it. You can search for an IFA on https://www.unbiased.co.uk

Thanks. You are correct about the current value of the pension pot. What I had calculated was the value it would have if I got only the extra years service which will come by virtue of working. This then allows me to see what increase in salary I can get to stay within the LTA. In my case if I get no more salary increases then the value of the fund will be just below the 1.5 million. Hence given that I would expect to get annual increases of about 3-4% this means that I will go above the LTA. This is why I was looking at Fixed Protection. That will only help if the benefit accrual is less than CPI. This seems unlikely...

wygde3

One further thought ... If I think of it in a different way. My benefit accrual each year is 1/54 plus % salary increase. If I guess at 3% salary increase then this means that my benefit accrual is just under 5% pa. this is almost certainly going to be more than CPI. Hence no point in Fixed Protection.

Correct reasoning?