As of last week the HMRC have made available application forms to apply for Individual Protection 2016 and Fixed Protection 2016. The forms can only be completed with a Government Gateway username and password unlike in previous years they cannot be submitted on paper, nor can they be submitted by an agent on behalf of the pension holder.

The two protections go some way to protect individuals who either at, or think they will be at, or above the lifetime allowance of £1 million.

Fixed Protection 2016 means that your lifetime allowance which is the largest possible pot you can build up without tax charges, will be fixed at £1.25 million however you will lose Fixed Protection 2016, and pay tax on any value of your fund above the standard Lifetime allowance when you draw your pension, if you keep building pensions further. There are some exceptions but generally speaking it should be assumed that the pension is frozen apart from investment growth, and/or inflation linking, for the foreseeable future.

With Individual Protection 2016 benefits can continue to be built but the lifetime allowance will be protected only to the lower of £1.25 million or the value of your pensions at 5th April 2016.

The valuation basis for Fixed Protection or Individual Protection works the same with any final salary, defined benefit pensions being assessed as twenty times the value of these pensions had they come into payment without penalty on 5th April 2016. The value of any “money purchase pot” is simply added to this value. For example, an individual who has a £20,000 per annum pension at 5th April 2016 (note to be a very different value to date of leaving employment, or projected value at normal retirement age) will have a value of their pension at £400,000. If they also have a money purchase pension that was valued at £700,000 at 5th April 2016 then they will also find they are at £1.1 million and can either apply for individual protection 2016 given protection at £1.1 million or Fixed Protection 2016 at £1.25 million or both, on the understanding that they cannot make further accrual on the basis of Fixed Protection 2016.

Where an individual loses Fixed Protection 2016 they will pay tax on any pension value above the standard lifetime allowance, and also be required to let the Revenue know they have lot Fixed Protection or suffer a further penalty if this is not disclosed in due time.

One of the unexpected side effects of the EU Referendum on 23rd June 2016, is that many pension funds would have increased significantly in value (10% or thereabouts) after the Fixed Protection cut off of 5th April 2016, and furthermore, Final Salary Pensions may react to any future information over the next couple of years caused by the depreciation on currency by a similar amount. These are not guaranteed trends but will potentially influence advisability of Fixed Protection 2016 and Individual Protection 2016 of any given individual. For those that had a lifetime allowance of over £1.25 million as at 5th April 2014 there is also a cut off of 5th April 2017 to apply for Individual Protection 2014. This is not a new protection but whether an annual bill has contributed on or after 5th April 2014, this would be available for anyone who had benefits over £1.25 million. The basis of assessment is the same as Individual Protection 2016 but the protected limit is that at 5th April 2014, or if lower, £1.5 million.

Due to the number of variables involved in this decision, it is a complex area and we recommend individuals get advice if they feel it affects them. A link is enclosed below to the HMRC website for more information or please get in contact with Alistair Cunningham in our office for further advice.

https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance

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