People opting for enhanced protection post A-day could face a £3,000 fine if they fail to tell the Inland Revenue they have swapped to primary protection, warns industry expert Steve Bee.
His discovery follows the publication of the Finance Bill last Thursday, which outlines the finer details to the new pension simplification rules coming into force in April 2006.
After his first reading of the Bill, Steve Bee, head of pensions strategy at Scottish Life, reveals people who opt for enhanced protection will be liable to fines if at any time before they reach age 75 they fail to notify the Revenue of any "relevant benefit accrual".
The Revenue's latest pension simplification paper, published in December last year, says people will be able to choose between three different kinds of transitional protection, in the hope they will not be worse off as a result of the new legislation.
One of the options - enhanced protection - will give people full protection from the recovery charge on the fund at vesting.
However, all pension accrual or any future contributions must stop when the new rules come into force in April 2006. If a person would like to continue building his or her pension fund, primary protection may be a wiser option as it - although giving less protection - allows the fund to grow.
While several pension experts have cautioned enhanced protection may encourage IFAs to advice their clients to opt out of their pension schemes, others believe this would only be a minor issue as people would be able to be 'jumped' between the different protection options.
With the latest legislation changes in mind, Bee suggests this is "a bit of a far cry from the comfortable view that people taking advantage of the enhanced protection status would be able to undo it at any time by simply rejoining the pension system".
That said, Bee believes this will be positive for IFAs advising on these matters. He says it is "as compelling an argument for seeking advice on any pension-related matters as we'll ever hear, that's for sure. Complex pension decisions made without advice and ongoing monitoring seems like it'll be a bit on the foolhardy side to me".IFAonline
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