Peter had just received a benefit statement from the scheme and was a bit concerned. His intention was to consider retiring at age 60, which was in just a couple of years’ time, but the normal retirement age under the scheme was 65. £300 per month contributions had been made into an AVC scheme in addition.
Peter was married for the second time, and his wife was younger than him. Together they had a couple of school children and a reasonable-sized mortgage. His family health history was poor and he had had a minor heart attack two years ago, although he had fully recovered now.
Peter had been to visit his pension adviser to discuss pension planning. It appeared that his current pension benefit was valued at about £1.4 million (20x his prospective pension, plus his lump sum) as his employer paid about 12% of his current remuneration of £150,000 into the scheme. In addition, the scheme offered a spouse’s pension which was 4x salary, with death in service benefits and the possibility of an ill health pension based on prospective scheme service.
He had heard of fixed protection 2014, which would allow him to protect £1.5 million, but was not happy that he would have to cease paying contributions and probably have to opt out of the pension scheme to avoid the extra accrual invalidating his fixed protection. He knew he was due a couple of pay rises and also felt that, with the current inflation figure falling, the CPI limit on relevant benefit accrual could easily be breached.
Taking his adviser’s guidance, Peter spoke to his employer and asked them whether they would be prepared to pay him the money that they contributed to his pension scheme in some other form of remuneration. The answer he got was that this would not be possible as it was not company policy.
His adviser had explained the concept of individual protection to him, which he understood would give someone with pension savings worth between £1.25 million and £1.5 million a personal lifetime allowance (LTA) of the amount as valued on 5 April 2014.
The main difference between fixed and individual protection was that with individual protection, he would be able to continue saving without limit into the scheme but with the LTA tax charge applying to the excess over the personal LTA as set at 5 April of 25% on money drawn as a pension, and 55% on a lump sum. So his current pension value of £1.4 million would be his new personal LTA.
This was obviously not quite as good as the £1.5 million that could be protected by fixed protection, but the idea of having to opt-out of his generous DB scheme was even less attractive to him. Peter’s health situation and his family circumstances meant that the ancillary death and health benefits were of a greater value to him, particularly for the next couple of years before retirement.
Two other things that he had been told by his pension adviser were:
So, although a plan to mitigate his potential tax payment and balance his risks and priorities was coming together, Peter couldn’t help thinking to himself – pensions are not easy!
Mike Morrison
Head of Platform Technical
AJ Bell