This tax year end brings a unique use it or lose it opportunity with 5 April 2009 being the final date to apply for primary or enhanced protection. With HM Revenue and Customs recently confirming many forms are being submitted incorrectly, time is running out to help those high net worth individuals who still need to protect their large pension benefits.
The introduction of the lifetime allowance from April 2006 (A-Day) means high earners face the prospect of a 55% tax charge applying to some of their benefits. By applying for enhanced protection, primary protection or both, that tax bill can be reduced or removed entirely.
Enhanced protection fully protects an individual. But the quid pro quo is that contributions can't be made on their behalf to a defined contribution scheme after A-Day, and they can't build up benefits above a certain restricted level in a defined benefit scheme.
Primary protection safeguards the value of benefits at A-Day increased in line with rises in the lifetime allowance. Anything built up above this level continues to face a 55% tax charge.
To apply for protection, a client needs to submit a 'Protection of existing pension rights (APSS 200)' form. The form can be sent or delivered to the Pension Scheme Services unit in Nottingham, or to any local tax office, as long as the form is in HMRC's hands by 5 April.
To be an acceptable notification it also needs to be signed, dated and completed in any section starting 'You must'. This may sound as if I'm stating the obvious, but one of the most common reasons HMRC reject forms is that only one box is ticked in the Declaration at Part 5, when both tick boxes need to be completed. Another reason for rejection is that questions requiring completion are left blank - 'N/A' or 'nil' should be used for the avoidance of any doubt.
Care should also be taken as some questions ask for the same information and conflicting answers will result in the form being rejected. For example, question 3.6 which deals with enhanced protection and question 4.4 covering primary protection ask for the same information.
This year's pre-budget announcement that the lifetime allowance is going to be frozen may also affect any decision to apply for protection. A reasonable expectation was that the lifetime allowance would increase from 2011 onwards in line with prices or earnings. Instead it will remain at £1.8 million until at least 5 April 2016.
If an individual has benefits worth £1.2 million today then a return of 6% after charges would result in them exceeding the frozen lifetime allowance by 2016.
While a return of this level may be challenging in current conditions it wouldn't appear impossible over the next seven years. Bear in mind the option to register for enhanced protection will only apply to those who haven't made any further payments since A-Day.
Only a relatively small number of people have large enough benefits to be affected by the lifetime allowance. But, at the risk of stating the obvious, those who do will be important clients.
People who don't register in time will face an unnecessary tax bill, which could reach tens or hundreds of thousands of pounds. The end of the tax year presents huge planning opportunities. But a simple check to make sure all those who should have applied for protection have made acceptable submissions could be one of the most important financial planning steps of the year.
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