Contracting out may invalidate enhanced protection - Abbey

According to AfI's head of pensions and retirement Mike Brown, an anomaly has been detected in the latest update of pending pension legislation coming into effect in April 2006.

This anomaly could see people, who decided to protect their pension funds by adopting enhanced protection, ending up with no protection at all if they have already contracted out of the State Second pension, says Brown.

Enhanced protection will under the new legislation protect people who are worried their pension pots will exceed the £1.4m lifetime limit. While it will protect the whole fund from having to pay a recovery charge at vesting, all future accruals or contributions have to stop at A-day.

Because contracted-out contributions will count as further accruals it will effectively 'invalidate' the protection, Brown explains.

That said, it will not affect people saving through an occupational pension schemes, argues Brown, as it will only hit people with personal pensions.

With this in mind, he warns IFAs to "take great care" when advising on contracting out, especially as rebates as small as £1 could invalidate enhanced protection, he cautions.

IFAonline

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• Inland Revenue
• Abbey for Intermediaries