Every time the government has reduced the Lifetime Allowance, a transitional ‘protection scheme’ has been introduced to sweeten the pill. There is no one-size-fits-all solution, however, and the regulations surrounding each protection scheme are complex with now over nine protection permutations. Does your adviser or accountant know this subject inside out?

Unfortunately, we have helped many new clients who have previously been poorly advised in the area of pension protection – either because their former advisers have not even considered it, do not understand this complex area or shy away from advising on the NHS pension.

One doctor was advised to rescind ‘Enhanced Protection’ in order to restart private pension contributions. He then had to put Fixed Protection in place which he subsequently lost because he remained an active member of the NHS scheme. Unfortunately, his LTA has now fallen from a potentially unlimited amount to £1.5m.

Many doctors believe they are protected by the Enhanced Protection scheme only for us to discover that they were not advised to cease contributions to their private pensions. Others believe that their total lump sum is also protected by Enhanced Protection, which is normally not the case.

Another nearly lost Primary Protection when he was getting divorced. If he had not crystallised his private pension before divorce he would have paid 55% on the whole amount once crystallised after the decree nisi.

It is imperative you speak to an expert to ascertain which protection option is right for your circumstances. You may benefit from applying for more than one scheme and they each have different application deadlines. For peace of mind, speak to a Cavendish Medical adviser on 020 7636 7006.

If the total value of your pension savings will exceed the new lifetime allowance (LTA) rate of £1.25million, there are various options you can take to protect your pot:

Fixed Protection 2012

When the LTA was reduced from £1.8million to £1.5million in April 2012, HMRC introduced Fixed Protection to provide protection for pension funds up to £1.8million as long as no further personal pension contributions or benefit accrual in an occupational scheme took place. Most active members of the NHS pension scheme had benefit accrual in this tax year. Have you written to HMRC yet?

Fixed Protection 2014 (FP14)

As the standard LTA is cut again from 6 April, HMRC has introduced an updated Fixed Protection scheme. This will protect a pot of £1.5 million as long as no further personal pension contributions are made. Like its predecessor, FP14 will also test for ‘relevant benefit accrual’ on an on-going basis (an increase in value above inflation / CPI). The deadline for applications is 5 April 2014 but doctors cannot apply if they already have other protection schemes in place such as Primary, Enhanced or Fixed without further action.

Individual Protection 2014 (IP14)

HMRC has now finalised its consultation on a new individual protection scheme which will allow savers to protect their current pension fund value as at 5 April 2014 at a level between £1.25 and £1.5 million. The protection will then be fixed at this monetary value. Importantly, doctors will still be able to accrue benefits through both the NHS and private pension schemes without losing the protection. To qualify the value of the pension rights must exceed £1.25m at 5 April 2014.

Applications for IP14 will be open from August 2014 until April 2017. Doctors with Enhanced Protection were originally blocked from registering for the new IP14 but following industry feedback as part of HMRC’s consultation, this restriction has now been lifted.

Primary Protection

The original pension tax protection scheme was called Primary Protection and was introduced in 2006 to help individuals who had accrued pension benefits in excess of the new lifetime allowance rate of £1.5million coming into force at that time. Savers could continue to pay into a pension scheme after they had applied for Primary Protection but only the level of benefits they had protected would avoid any excess LTA charges.

Primary protection must have been applied for by April 2009. If you have Primary Protection you can also have Enhanced Protection, but not Fixed or Individual Protection.

Enhanced Protection

Enhanced Protection is also an historical scheme, introduced in 2006. This protection was designed to help savers who either had already accrued benefits in excess of the LTA, or believed that the future pension fund growth would be large enough to breach the LTA when benefits were taken.

Unlike Primary Protection, Enhanced Protection protected the whole of the individual’s benefits irrespective of what fund size they grew to. However, Enhanced Protection was not guaranteed and can be lost if strict restrictions are not followed. The danger with Enhanced is that you may not realise it has been lost until the time you decide to draw benefits and the qualification test is carried out. Furthermore, if you did not take out specific tax free lump sum protection on application you may not be able to receive all of your anticipated lump sum. The onus is on you to carry out a regular review of your position.

For more information, call the Cavendish Medical expert team on 020 7636 7006