Individual protection (IP) maintains the lifetime allowance at a certain level depending on what type the customer has. There are now two different versions:
|Type||Maintains the lifetime allowance at||You must apply before|
Individual protection 2014
the lower of £1.5 million OR the value of benefits at 5 April 2014
5 April 2017
Individual protection 2016
|the lower of £1.25 million OR the value of benefits at 5 April 2016||
No end date
IP gives individuals who think that the value of their benefits will be over the lifetime allowance when they come to take their benefits, a personalised lifetime allowance based on the value of their pension savings.
IP 2014 allows someone whose pension rights are valued over £1.25 million (the lifetime allowance from 6 April 2014) to protect those rights, subject to an overall maximum of £1.5 million.
IP 2016 allows someone whose pension rights are valued over £1 million (the lifetime allowance from 6 April 2016) to protect those rights, subject to an overall maximum of £1.25 million.
For example, someone with pension rights worth £1.2 million at 5 April 2016 will be able to have £1.2 million as their personal lifetime allowance through IP 2016. Someone with pension rights worth £1.3 million will be able to have £1.25 million as their personal lifetime allowance, helping them to reduce their lifetime allowance charge.
This personalised lifetime allowance will not increase unless the lifetime allowance increases to a level greater than the individual's personalised lifetime allowance. In these circumstances the individual's personalised lifetime allowance would revert to the new standard lifetime allowance.
A crucial difference from fixed protection is that an individual can still be an active member of a pension scheme.
IP will be useful for an individual who intends to continue contributing to a pension scheme as it allows them to keep a lifetime allowance greater than the standard lifetime allowance that applies.
IP may also be beneficial to an individual whose employer normally contributes towards their pension scheme as it allows them to continue receiving the value of the employer's contribution, even though a tax charge will apply to the benefits it provides. This will be particularly useful where the individual isn't able to renegotiate their employment package, for example receive their employer contribution in a more tax efficient format.
It is possible to apply for IP if an individual already has fixed protection (FP). Individuals will be able to apply for both FP protection and IP and where this is the case, FP will take precedence. If FP is lost, the individual will revert to IP.
The interim paper process for applying for FP16 and IP14/16 has now ended.
Any applications made after 31 July 2016 using the paper process will be returned by HMRC. Any applications that HMRC did have at that point will be processed but the individual will receive a permanent protection notification number. Those individuals will not need to reapply online and will be able to view details of their protections on their HMRC Online Services Account
Any individual who now wishes to apply for lifetime allowance protection will have to do so online.
The individual will need an HMRC Online Services Account, if they do not already have one they will have to create an account. If the individual had applied using the interim paper process details of their lifetime allowance protections will already be held on their online account.
HMRC services: sign in or register.
Individuals will no longer receive paper certificates with their lifetime allowance protection details.
Guidance to help individuals who wish to apply for lifetime allowance protection has been published by HMRC on GOV.UK. They have also produced a new guide for valuing pensions for IP2014 and IP2016.
Individuals that have used the interim paper process but have not followed this up with an online application will continue to have their savings protected and there will be no tax consequences, provided they have not lost their protection.
However, if the individual has further benefits to crystallise they must apply online to get a permanent reference number. Scheme administrators will use HMRC’s ‘look up service’ once it becomes available to check the level of protection and only permanent reference numbers will be recognised. This means that until the individual has a permanent reference number the payment of benefits will be a delayed or the lifetime allowance charge will be applied.
Unlike FP2014 and IP14 there is no deadline for applying for FP16 and IP16.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.
In addition, the information provided is also based on our current understanding of the relevant Finance and Pension Acts and Bills.
Published 23 March 2016