How auto-enrolment could present a financial danger to those with large pension pots

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The general feeling around the government's automatic enrolment scheme is that it is not only a good thing, but a vital thing for the many thousands of savers who are not putting enough away to ensure they can support themselves in their retirement.

However, there is a group of people who may find that they are not best served by the scheme when it finally reaches their workplace between now and 2017-2018.

If you are lucky enough to have built up a large pension pot during your life, then you may already be aware that there is a certain limit that your savings can reach up to, before you incur what is known as a lifetime allowance tax charge.

This limit used to be £1.8 million, but was revised down to £1.5 million in 2012. On 6th April 2014, it will be revised down again to £1.25 million.

Savers have been able to apply for a variety of different types of 'protection' from the lifetime allowance tax, most notably at times when the limit has been revised. In 2012, many savers took advantage of Fixed Protection and, in 2014, savers can apply for a new form of fixed protection if they have already built up more than the £1.25 million cap (the maximum is £1.5 million).

However, by applying for the new fixed protection (which you can do from now, and must do before April 6 2014), savers commit to the following:

  • not to have any further contribution paid to any of your money purchase pension pots
  • not to build up new benefits in a defined benefits or cash balance pension pot above a set amount
  • not to join a new pension scheme - unless you're only transferring pension savings from one of your existing schemes into the new scheme
  • not to start saving in a new pension pot, either under an existing or new pension scheme.

All of the above factors can be breached by being automatically enrolled into a workplace pension scheme, meaning those with large pension pots who are still working in some capacity will be particularly at risk of losing their fixed protection.

What's more, those who wish to keep their fixed protection have a very small amount of time to make sure that they opt out of their employer's automatic enrolment procedures. The government has set a time limit of only one month for those benefiting from fixed protection to opt-out of a new automatic enrolment scheme. It is also worth noting that employers are obligated to re-enrol those who opt out of automatic enrolment every three years, meaning that, if you are still working, you may need to remember to opt out once again.

The government has committed to writing to those who benefited from enhanced protection (which was available in 2006) but will not be writing to people with fixed protection, meaning the onus will be on the saver to make sure they have carried out their calculations and are ready to opt out of their automatic enrolment scheme if necessary.