Public sector pension schemes and fixed protection

From 6th April 2012, the lifetime allowance for tax privileged pension savings is being reduced from £1.8m to £1.5m.

Pension benefits in excess of this new lower lifetime allowance will be subject to a recovery charge.

Whilst £1.5m is a lot of money, it is estimated that around 100,000 members of public sector pension schemes could be caught out when the lifetime allowance is reduced.

This is because a formula of twenty times the annual pension income is used to test pension benefits against the lifetime allowance.

It means that anyone who starts receiving a pension income over £75,000 a year from 6th April 2012 will be subject to a 55% recovery tax charge, unless they implement a form of protection ahead of this change.

Fixed protection is an option available to those with large pension funds or significant pension benefits.

This needs to be registered ahead of 5th April and one implication of fixed protection, which gives the pension scheme member a lifetime allowance of £1.8m rather than £1.5m, is that you need to opt-out of your defined benefit pension scheme.

To understand whether you are better suffering the recovery tax charge or leaving your final salary pension scheme requires a reasonable level of data gathering and analysis.

Based on the typical length of time it can take for a pension scheme to provide the necessary data for this type of advice, anyone who needs to consider whether they should register for fixed protection should be doing so within the next week.

Even with this timescale, we expect certain public sector pension schemes to struggle to provide information in time for us to provide our analysis and advice ahead of the end of the tax year.

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