A consultation document has been launched into the new individual protection regime following last year's reduction in the lifetime allowance. Helen Morrissey asks whether this new protection is useful or whether it is an unnecessary complication
When George Osborne cut the lifetime allowance (LTA) to £1.25m it brought more people into the protection regime. In June HMRC and the Treasury issued a consultation document on individual protection (IP).
While more people will undoubtedly be in need of protection against the reduced LTA it adds to the already complicated protection regime. The consultation document introduces IP as well as new fixed protection 2014 (FP14) to a regime that already comprises enhanced, primary and fixed protection.
IP differs from its predecessors in that holders can continue to make contributions to a pension scheme. In contrast those holding other types of protection must cease contributions. IP will give individuals a personalised LTA based on the value of their pension savings at 5 April 2014 (up to £1.5 million). According to the consultation document individuals have three years to apply for IP from 6 April 2014.
So who is the target market for IP and what issues need to be considered before using it?
Hargreaves Lansdown’s head of pensions research Tom McPhail admits he struggles to see the rationale behind IP.
“I did find IP puzzling,” he says. “Is it related to auto-enrolment? Do they want to try to accommodate extra contributions? We just have extra complexity. At least if you endure a real loss to your fund then IP will allow you to rebuild your pension pot so in some cases it can make sense.”
Aries Pensions director Ian Neale also admits that at first he struggled to see the relevance of IP but now believes it can play a part in retirement planning.
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