At the start of one of busiest times of year it is easy to think about all the obvious things that need to be done with clients: the annual details such as using up the remaining annual allowance and getting in the tax return on time. There is however evidence from HMRC to suggest that many advisers have not started to consider whether or not to apply for Fixed Protection for their clients.
Apply now!
HMRC have written to AMPS reiterating that the deadline to apply for Fixed Protection will not be extended beyond 5 April and applications should be submitted in good time, especially for those that want to crystallise soon after the end of the tax year.
There's no scope for late applications and again HMRC have reminded AMPS of this. If the application is not with HMRC before the end of the tax year then Fixed Protection can not be an option.
Leaving applications until the last minute may mean that they are still processed but if the client suddenly, or not so suddenly, wants to take benefits then they will not be able to do so until they receive their Fixed Protection certificate, even if they are not currently crystallising over the Lifetime Allowance.
The percentages of the Lifetime Allowance used in the crystallisation event would be incorrect and have a knock on effect for future crystallisations.
Making the difficult choices
It seems at first look that it is an easy decision whether or not to apply for fixed protection. Are they near the Lifetime Allowance now? Are they over £1.5 million already? But what of those that are not currently near the limit - are they invested in assets that may push them closer?
It seems unlikely that the Lifetime Allowance will go up during the next 5 years. Long term consideration needs to be given to a wide range of clients.
Enhanced protection
There are increased complications when you consider those clients who have Enhanced Protection already; more thought needs to be given to them and what they intend to do in the immediate and long term future. There seems to be two main issues to consider:
Firstly the issue of tax free cash. It is a non-issue if the client had tax free cash in excess of £375,000 at A-day and had this protected through Enhanced Protection. The client will not be any worse off after the reduction in the Lifetime Allowance as the percentage protected will be applied to the actual fund value at crystallisation and not a maximum of £1.5 million.
For those that do not have protected tax free cash there is more to consider as they will only be entitled to the maximum of 25% of £1.5 million under Enhanced Protection and not £1.8 million; in the most extreme case a difference of £75,000.
Crystallising before the end of the tax year may mitigate this issue however, given the punitive tax charges on crystallised funds in comparison to uncrystallised pre age 75, a good number of investors are wanting only to crystallise what they need to.
Take into account those also wanting flexible drawdown that have contributed this year - they cannot enter flexible drawdown until 2012/13 - and there are good reasons to wait.
Secondly if they are crystallising, are they likely to take income? If they are currently near the Lifetime Allowance and crystallise into capped or flexible drawdown but do not take income and intend to stay this way, remember there will be another Lifetime Allowance test at age 75.
The test takes account of the value of benefits previously crystallised so as not to double count but will also take account of any growth in the fund since it was crystallised. For those not taking income the amount attributable to growth will be more and hence more will be tested against the Lifetime Allowance.
With Enhanced Protection there is no risk of a tax charge but with Fixed Protection, if the growth is sufficient, a tax charge may be applicable.
Therefore it is important not to dismiss those who already have Enhanced Protection as it may now not be the best option out there for the long term. It will be more complex and time needs to be set aside to review these individual clients.
Final thoughts
This reiterates HMRC's concern about the lack of applications they have received to date. There are many clients out there that would benefit from Fixed Protection and the advisers start looking at all those clients who are not contributing the more time they'll have to consider the issues that may arise and the conversations that need to be had.
Fixed Protection is a one-off and HMRC have learnt from A-day, keeping the application process and form simple and easy to complete.
Once the decision is made advisers just need to get the forms to their clients for completion and subsequently to HMRC to avoid any delays at the beginning of the next tax year.
Claire Brooks, Pensions Technical Manager
Suffolk Life
