Colin is 54 years old. He has run several successful auto-repairs businesses during his career, enabling him to build up a retirement fund worth £1.2 million as of April 2016.
Colin’s money is roughly equally split between two Sipps and a stakeholder pension with a life insurer.
After the announcement of a cut in the lifetime allowance (LTA) in the 2015 Budget, his adviser put in a successful fixed protection 2016 application. This allowed him to preserve the £1.25 million LTA but barred him from making any additional contributions.
However, in December 2017 he realised he had forgotten to cancel a standing order into his stakeholder pension. As a result, he had paid in £5,000 since being granted fixed protection 2016.
While both the 2014 and 2016 flavours of individual protection allow clients to continue contributing to their pension, fixed protection rules force members to cease pension top-ups to benefit from a higher lifetime allowance.
On this basis, Colin’s fixed protection certificate is now void. He will face a tax charge on the excess above the non-protected lifetime allowance, either when he withdraws the funds or when his LTA is tested on his 75th birthday.
But a recent first-tier tribunal ruling might give Colin some hope of keeping his fixed protection.
The case centred on Gary Hymanson, the sole director of Lightcredit Limited – a company based in the Manchester area that trades as Granmore Ceilings. In coming to his decision, the Judge noted Hymanson’s reliance on advice in relation to matters such as pensions and tax.
While Hymanson told the court he understood he could not make any further lump sum contributions to his pension plans, he did not realise existing direct debits would also have to stop. These direct debits totalled around £7,000 until they were finally stopped in April 2015.
In his defence, Hymanson said: ‘If I had correctly understood these existing direct debits were also not allowed under the fixed protection regime, I would undoubtedly have told the bank to cancel them, in the same way that I did not make further contributions to the Light Credit Pension Scheme.’
HMRC argued Hymanson’s failure to cancel his direct debits in respect of two pension schemes should render his fixed protection certificate worthless. But the Judge ruled the accidental nature of the breach meant the protection remained valid.
If HMRC fails with any subsequent appeal, Colin could have a strong claim against having his valuable fixed protection revoked.
While clearly the best possible outcome for Colin would be not to lose his fixed protection at all, applying for individual protection 2016 would be a sensible step to limit any potential damage.
Because individual protection can be held at the same time as fixed protection, Colin’s lifetime allowance should revert to the value of his pensions at 5 April 2016 should his fixed protection be deemed void. This will fix his lifetime allowance at £1.2 million, rather than seeing it drop to the current level of £1.055 million.
Colin can also continue making contributions to his pensions without losing this protection. This will be particularly useful if at any point in the future he becomes employed and benefits from a matched employer contribution as well as tax relief.
Tom Selby is senior analyst at AJ Bell