"As an industry, we put a lot of effort into assuring fair Government treatment for high earners. But what about the rest?" asks Aries' Ian Neale as he looks at Individual Protection (IP).
When the Lifetime Allowance (LTA) is reduced from £1.5m to £1.25m next April, those whose pension savings are already over the new limit will be entitled to apply for IP. A new Government consultation this week fleshes out the plan which will result in a personalised LTA, being the value of the member's accrued rights as at 6 April 2014.
IP will allow pension saving to continue, with the excess over the personalised LTA being subject to a charge - and it will be available alongside Fixed Protection (FP) in 2014. This means those hoping their benefits will continue to grow know that if they apply for IP as well, and then breach FP, they can still enjoy an LTA above £1.25m.
The Government thinks perhaps 120,000 people will have pension savings over £1.25m in April 2014. Many of those with Enhanced Protection (EP) also have Primary Protection (PP), which protects a higher LTA than IP and cannot be lost, and those with EP alone have already had a good deal - so the Government thinks they shouldn't be allowed to apply for IP.
Applications for IP can be made from summer 2014, after the Finance Bill 2014 gains Royal Assent, up to 5 April 2017. This is to allow time to value not only benefits accrued in the individual's current scheme(s), but also uncrystallised rights elsewhere (including QROPS and other non-UK pension schemes); post-A Day BCEs; and pre-A Day pensions already in payment. Everything has to be factored in.
So it is clear that complification marches on!
As always when the Government decides the rules have been too generous, existing benefit entitlements have to be protected against new tax charges. But there is no protection against other Government policies which have been far more damaging to millions of pension savers.
As an industry, we put a lot of effort into assuring fair Government treatment for high earners (in this case just 120,000 people). But what about the rest?
Annuity rates continue to decline remorselessly: there is a close relationship with interest rates which, in turn, are linked to gilt yields. The introduction of quantitative easing has driven gilt yields to historic new lows and thereby accelerated the plunge to the point where a £100,000 fund - which a generation ago could have bought a pension of £18,000 pa - today delivers a level annuity worth less than £6,000 pa.
Looked at another way, a single man on a salary of £30,000 pa retiring today at age 65 on a full basic state pension but no other income will require an additional pension fund pot of at least £400,000 to match his salary in just the first year of retirement. Ongoing RPI protection could easily cost him a further £150,000 as well.
We must soon decide where our priorities lie as an industry. This perhaps involves taking the short-term focus away from those with million pound pots and on to those who are just looking to keep their head above water.
Written by Ian Neale, director, Aries Pension & Insurance Systems Ltd
ian@ariespensions.co.uk
