Senior executives and higher earners could lose the benefit of lifetime allowance protections in a sorry side-effect of auto enrollment contributions if they fail to take action quickly.


Senior executives and higher earners within a company could face the prospect of losing key protections for their pension fund under the pension auto enrollment rules, unless they act now to keep them.

Every employee of a company offering auto-enrollment – which is a statutory requirement for companies employing staff in the UK, with smaller firms obliged to start enrolling members from 2015 – will automatically be included in the pension scheme offered by the firm. While for many, the option of having employer contributions added to their own pension savings will be a benefit, for higher earners and senior executives there is a potential banana skin in the associated loss of enhanced and fixed protection of the lifetime allowance.

How the protection is lost

Once you have been enrolled into the scheme, if you fail to opt out within one month of that action, then you will be considered to have joined the company scheme, creating the knock-on effect of removing any protection you enjoy against the reduction of the LTA from £1.8m to £1.5m in 2012, and from £1.5m to £1.25m in 2014.

Of course, you do have the option to opt out, but if you leave it longer than a month from being auto-enrolled to make this decision, you will not be able to benefit from the ongoing LTA protections. They will simply be lost.

Why do I need LTA protection?

If you have built up a pension fund that has more than £1.25m in it from April 6 2014, then you will be taxed on the amounts above that limit when you come to take your pension. If the additional money is used to generate a pension, it will be taxed at 25%, but if it provides a lump sum – which most scheme rules allow – then it will be taxed at a hefty 55%.

Levels of protection

Some people have higher LTA protection levels than others, and this will depend on when they chose to protect these limits. For example, from April 6, 2006 you could apply for a higher LTA – known as primary protection – which was based on the level of pension savings they were making at that stage. It was also possible to take yourself outside of this regime altogether, which is known as ‘enhanced protection’.

What to do now

If you are likely to reach these limits, then you need to take action. You can apply for fixed protection to retain a lifetime allowance of £1.5m until April 5 this year – the day before the LTA falls to £1.25m – or you can apply for individual protection within the next three years to retain the £1.5m cap, but this is based on your pension savings up to April 5.

Remember, the pension auto enrollment will happen every three years, so if you want to continue to retain this protection, you must opt out within a month of each auto-enrollment triennially – this is not a ‘make it and forget it’ decision.

Find out how to manage all your other financial concerns effectively: Managing the six biggest financial concerns of senior re/insurance executives.