Top earners protect pot

Employees who will have more than £1.5m in their pensions pot in April 2006 could benefit from ‘primary pensions protection’.

These staff must register the amount that they have already accrued in order to avoid paying a 55% ‘tax and recovery’ charge on any amount above the £1.5m lifetime allowance limit. Primary protection is expected to benefit those employees who are willing to risk that their pension will not grow as fast as the lifetime allowance limit, which will increase over time.

Jane Beverley, technical consultant at actuarial firm Punter Southall, said: "Under primary protection, employees look at their benefits at A-Day and if they are over £1.5m, they need to look at the percentage [it is over]."

Primary protection, however, will only protect employees’ pension benefits if their fund grows in line with increases in the lifetime allowance. Anything over this amount will be subject to the recovery charge. Staff can continue to contribute to their pension but this could push them over the tax-free limit.

Employers should ensure that staff are aware they may still have to pay the recovery charge. "It’s quite likely benefits will increase at a greater rate than [the lifetime allowance] so if [employees] take primary protection, they’re likely to pay a recovery charge," said Beverley.

Staff can apply for primary protection up to 5 April 2009.