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Act fast or you'll miss out on pension protection

Any GP with a sizeable pension pot would be an April fool not to apply now for one-off protection against hefty tax charges coming in this month. But hurry up or you'll miss the April 5 deadline.

Any GP with a sizeable pension pot would be an April fool not to apply now for one-off protection against hefty tax charges coming in this month. But hurry up or you'll miss the April 5 deadline.

New pension rules that came into force three years ago could mean a substantial tax charge unless action is taken now. Whether or not you need to act depends on your circumstances but the deadline for doing so is 5 April this year – which is fast approaching. Unless you know you are definitely not eligible to apply for protection, my strong recommendation is that you do so now.

What's it all about?

On 5 April 2006 – known as ‘A-Day' – the Government carried out a massive revision of pensions law. The idea was to simplify all the different types of pension schemes that existed before A-Day and replace them with one set of rules applicable to all schemes.

The new rules introduced new concepts, one of which was the ‘Lifetime Allowance', a limit on the total pension rights you may accumulate over a lifetime and still have your pension enjoy a tax-favoured status.

Benefits can be built up above this level but these will be subject to the Lifetime Allowance charge of 55% unless you have protected against it.

The Lifetime Allowance charge could apply in a number of circumstances. The main reason is where a person has pension rights in excess of the Lifetime Allowance when they start to draw pension. The excess of their total pension rights from all sources – excluding state pension – above whatever limit the Lifetime Allowance is set to at the time, is taxed at 55%. The current Lifetime Allowance is £1.65m.

In order to minimise the impact of the rules on individuals who already had benefits valued either close to or in excess of the Lifetime Allowance, HMRC introduced some transitional measures: Enhanced Protection and Primary Protection.

It is possible for you to register for one or both of these types of protection if you think you will or may be subject to the Lifetime Allowance charge but you must register before the deadline. Failure to obtain the necessary protection by 5 April could result in the 55% tax charge.

Enhanced Protection

Enhanced Protection provides full protection against the Lifetime Allowance charge. It will not be payable as long as the Enhanced Protection is valid but you must not have had ‘relevant benefit accrual' since A-Day. In plain English, this means that you have paid no personal pension or SIPP contributions since April 5 2006, nor must you have paid into a money purchase additional voluntary contribution arrangement (as opposed to buying added years). There are also restrictions on continued membership of defined benefit schemes such as the NHS pension scheme.

Generally, continued membership of the NHS pension scheme would not make you ineligible for Enhanced Protection provided you have not had a substantial increase in your pension rights from the NHS since 5 April 2006.

But as your pensionable earnings from the NHS scheme are not known until at least a year after the end of the tax year when they occurred, it may be impossible for you to know at the moment whether you have had a substantial increase in pensionable earnings or not.

41223341HMRC is aware of the problem and the advice therefore is that you should apply now for Enhanced Protection if you have not already done so, because if you leave it until after 5 April it will be too late.

If it later transpires that your NHS earnings have increased to the extent that you are not eligible for Enhanced Protection, then it will merely be revoked. However you will not then have any protection from the Lifetime Allowance charge unless you have also been granted Primary Protection (see below).

Once Enhanced Protection has been granted it will remain in force unless it is lost (see box 1, left). If you do lose Enhanced Protection, you will then have no safeguard from the Lifetime Allowance charge unless you have also been granted Primary Protection.

Primary Protection

In order to be eligible for Primary Protection, the total value of your pension rights from all sources as of A-Day must have been greater than £1.5m. In the NHS scheme, your pension rights are valued for these purposes by taking your pension entitlement as of A-Day, multiplying it by 20, then adding your tax-free lump sum.

Therefore, if your only pension rights are from the NHS scheme, you would have needed a pension entitlement of just over £65,000 per year as of A-Day to be eligible for Primary Protection. If you had other pension rights, however, these would need to be valued and included in the total.

41223342It is possible to continue making further pension contributions or accruing further benefits after A-Day if primary protection is obtained.

If you have Primary Protection then HMRC will calculate your own personal Lifetime Allowance factor. Personal Lifetime Allowances under Primary Protection will then be adjusted annually in the same way as the standard Lifetime Allowance (see box 2, left).

If you believe that you are entitled to Primary Protection and you have not already applied, remember you have only until 5 April to do so.

If you satisfy both sets of eligibility conditions, it is advisable to apply for both enhanced and primary protection. Both applications are made using the same form. Enhanced Protection applications require few details, but Primary Protection is considerably more complicated and needs much more information.

Remember, to apply for either Enhanced or Primary Protection (or both) – act now.

Rosemary Smith is healthcare manager at Tenon, the UK's third-largest medical accountant

How can enhanced protection be lost? How personal lifetime allowances are calculated Are you eligible for a protected pension? Protected pension

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