Sackers’ Response to Consultation on Individual Protection 2014

Background

The joint HMT/ HMRC consultation on Individual Protection from the Lifetime Allowance Charge seeks to assist those with pension savings in excess of the new LTA when it reduces to £1.25m on 6 April 2014. IP14 will enable individuals to have a personalised LTA based on the value of their pension savings as at 5 April 2014 (subject to an overall maximum of £1.5m). The present consultation seeks input on the detail and implementation of IP14 alongside FP14.

General comments

As drafted, the legislation puts much of the onus on individual members. It would be helpful to have greater clarity generally as to where different responsibilities lie (ie those of the trustees and/or administrators and those of the individual).

At paragraph 3.16 the consultation states that “any new contributions […] on or after 6 April 2014 will be subject to the LTA charge when the individual takes their benefits”. It is unclear from this how IP14 will affect individuals with DC arrangements. In particular, will those individuals be able to rebuild their pots to the protected level without incurring a tax charge in the event that negative investment returns cause their pot to fall below their personalised LTA?

Although the draft legislation suggests that this will be permitted, it would be helpful if the guidance on this (ultimately the Registered Pension Schemes Manual) is clear on this point.

Consultation questions

Question 1: Are there particular difficulties for scheme administrators in allowing individuals to hold both fixed protection (FP12 or FP14) and IP14?

We consider that adaptations already made to administration systems to deal with earlier changes to the LTA and the various existing protections are likely to mean that an additional protection can also be dealt with.

However, it will be important to ensure that there are clear means for administrators and trustees to communicate with members about their protections and, if fixed protection is lost, for identifying when this loss occurs and IP14 comes into play.

Question 2: Do you agree that individuals with enhanced protection should be excluded from applying for individual protection? If not, please give the reasons why you think there is a case for allowing individuals with enhanced protection to apply for IP14 and set out any difficulties or issues this might create.

Individuals may lose enhanced protection (EP) through no fault of their own. It would therefore seem reasonable to allow individuals with EP to apply for IP14, particularly with a view to guarding against circumstances where actions or omissions by the scheme administrators or trustees could result in the loss of EP.

Question 3: Would monitoring an individual’s personalised LTA for the purposes of the tax free lump sum limit, be likely to create difficulties for scheme administrators?

There are already significant monitoring and record keeping responsibilities in connection with the existing protections. We therefore do not envisage significant difficulties for scheme administrators. We would, however, note that maintaining a dialogue between the scheme administrators/trustees and members in the run-up to retirement will be key, for example, so that an individual’s tax free cash can be set at the correct level.

Question 6: Should there be some form of revaluation of the pension debit for IP14 to take into account the change in the value of the individual’s pension rights since 5 April 2014 and if so, on what basis should this be done?

It would appear that an individual in this situation may not get the full benefit of their protection, for example, where tax has been paid on pension savings in excess of the individual’s protected level of benefits. It therefore seems logical that, where a pension debit relates to pension savings built up before 6 April 2014, the individual is able to rebuild their benefits up to the protected level, with their IP14 remaining unaffected.

Questions 7 & 8: Are there any particular reasons why a scheme pays adjustment should not be deducted from an individual’s personalised LTA, and in particular are there any specific administrative burdens that this might lead to? What would be the impact if a deduction was also applied to individuals with primary protection whose pension savings are subject to a scheme pays adjustment?

The purpose of scheme pays is to help manage the tax charge which may not be readily paid from other savings. We consider that the proposed approach could have a disproportionate impact on affected members who may effectively receive a double tax charge if their IP14 is reduced in this way. In addition, it may also increase the administrative burden and complexity, as a scheme pays adjustment is not currently made to the LTA for anyone who does not have protection. In our view, the treatment for individuals with IP14 should be consistent with the existing regime.
We also question the rationale for seeking to apply a deduction to members with primary protection at this stage.

Question 9: Are there any other circumstances when an individual’s personalised LTA under IP14 should be adjusted?

We consider that further adjustments to an individual’s personalised LTA under IP14 may give rise to unnecessary complications for both the administrators and the member, and may also result in double taxation on the same pension saving.

Question 10: Is a three year window for IP14 applications about the right timeframe, and are there any issues associated with this?

In our view, the proposed three year period is not unduly restrictive.

Question 11: Are there any difficulties and issues that may arise if individuals cannot apply for IP14 until summer 2014?

There may be practical difficulties for individuals who retire or who experience a benefit crystallisation event during the interim period in particular whilst the Finance Bill is still in draft, and for anyone who loses fixed protection during this time. In addition, for any individual who retires before registration for IP14 opens, with benefits in excess of the LTA, they will incur an LTA charge for which the scheme trustees would be jointly and severally liable. Generally the charge will be deducted from the member’s benefits before any benefits are paid out, even where there is a subsequent application for IP14. The situation therefore creates an additional complication for the scheme administrator.

Note: As advisers to trustees and employers of occupational pension schemes, we have focused on the issues relevant to our practice and have not sought to answer every question in the consultation.