FOR ADVISERS ONLY
Individual protection
- Individual protection 2014 gives individuals a protected lifetime allowance equal to the value of their pension savings on 5 April 2014, subject to an overall maximum of £1.5 million.
- Individual protection 2016 gives individuals a protected lifetime allowance equal to the value of their pension savings on 5 April 2016, subject to an overall maximum of £1.25 million.
- Pension contributions can continue to be paid. The value of any pension savings above the protected lifetime allowance will be liable to the lifetime allowance charge.
- There is no deadline for applying for individual protection 2016.
What is individual protection?
Individual protection (IP) maintains the lifetime allowance at a certain level depending on what type the individual has. There are two different versions:
| Type | Maintains the lifetime allowance at | You had to apply by |
|---|---|---|
| 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 between 6 April 2014 and 5 April 2016) 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 between 6 April 2016 and 5 April 2018) 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 can 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.
Applying for individual protection
Any individual who wishes to apply for lifetime allowance protection has 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. Details of their lifetime allowance protections will 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.
There is no deadline for applying for FP16 and IP16.
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.
Temporary reference numbers
Individuals that have used the interim paper process (before 31 July 2016) 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 can use HMRC’s ‘look up service’ 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.
Frequently asked questions
Yes, in many cases applying for both FP 2016 and IP 2016 could be the best option.
FP 2016 provides protection of £1.25 million whereas IP 2016 provides protection of between £1 million and £1.25 million.
If FP 2016 is lost because one of the conditions is broken, the individual could fall back on IP 2016.
If possible, it may be advisable to delay taking benefits until IP 2016 is granted or only take benefits up to the lifetime allowance of £1.25 million. If that isn't possible, the scheme administrator will have to assume either that the individual:
- Will receive the protection and then apply a lifetime allowance charge later if the protection isn’t granted
OR
- Won’t receive the protection, apply a lifetime allowance charge and then adjust the benefits after the charge is refunded if protection is given
Further information
Note
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
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.
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