This article considers the key points for Individual Protection.
The reduction in the Lifetime Allowance from £1.5m to £1.25m for 2014/15 onwards has created an issue for individuals who may have already built up pension savings in the expectation that the allowance would remain at least at £1.5m. In response to this the Government has announced that there would be two forms of protection available, Fixed Protection 2014 and Individual Protection, for those who will be affected by the change.
Who can register for it?
Only those with more than £1.25m of private pension saving on 5 April 2014 can apply for Individual Protection, as long as they don’t have primary protection.
This means that an individual can apply for Individual Protection even if they have either Fixed Protection 2012, Fixed Protection 2014 or Enhanced Protection.
What protection will it give?
Individual Protection will give a personalised lifetime allowance based on the value of pension savings at 5 April 2014, up to a cap of £1.5m. For example, if the value of an individual’s pension rights at 5 April 2014 is £1.4m then their personal lifetime allowance will be £1.4m.
Individual Protection will apply until such time as the standard lifetime allowance increases to the same level, after which an individual will have a standard lifetime allowance.
Who might benefit from Individual Protection?
Broadly, Individual Protection may be helpful for:
- individuals who want to continue to accrue pension benefits after the 5 April 2014 but wish to protect existing pension saving from Lifetime Allowance charges
- individuals wanting to top up pension savings if the value of their accrued pension benefits subsequently falls in value
- individuals wanting to continue to benefit from employer pension contributions, if they opted out of the pension scheme, they may not have been able to receive the value of those employer contributions in another form such as higher pay
- individuals wanting to continue to benefit from death in service benefits from remaining an active member of an employer’s pension scheme.
When will clients be able to register for Individual Protection?
We understand that it is likely that the required HMRC forms will be available from August 2014. Clients will have up to three years to register for individual protection, i.e. 5 April 2017. This will give clients the time to obtain the relevant valuations of their total pension savings as at 5 April 2014, which will be required for registration purposes.
Can clients register for both Individual Protection when they already have Fixed Protection 2012, or 2014 or Enhanced Protection?
Yes. Fixed Protection or Enhanced Protection will take precedence over individual protection. Fixed Protection or Enhanced Protection may be invalidated by further accrual of benefits, or by a transfer of benefits to an arrangement that doesn't meet the benefit accrual rules set out by HMRC.
However Individual Protection is not available for clients who have previously registered for primary protection.
Why would eligible clients register for Individual Protection when they already have Fixed Protection 2012 or 2014 or Enhanced Protection?
In simple terms, clients would do this to provide a safety net to underpin the value of their pension savings above £1.25 million. This is because their Fixed Protection or Enhanced Protection may disappear if they fail the relevant benefit accrual tests.
For a client with £1.4 million of pension savings ensuring that Individual Protection is registered could, as a minimum protect:
- an additional tax-free pension commencement lump sum of £37,500
- the balance of £112,500 capital from the additional tax charge that would otherwise apply to the income generated by that capital
- the £150,000 from a 55% tax charge if paid as a lump sum death benefit if the client dies before age 75.
Can a client lose Individual Protection?
Any client who has obtained Individual Protection 2014 for lifetime allowance purposes will have this protection reduced to account for the sharing debit. This will be reduced by the amount of the debit, taking into consideration a 5% reduction in the debit amount for each full tax year after the tax year the protection applies to (i.e. 2014). If this reduces the clients lifetime allowance fund value to below the relevant level in 2014 (£1.5 million) Individual Protection would be lost.
How do you value an individual’s pension savings as at 5 April 2014?
The valuation of benefits will depend on the type of scheme in which benefits are held, and also whether the client has previously crystallised benefits under any of those arrangements. In some cases clients will have a mixture of arrangements, so care needs to be taken to ensure that a correct valuation basis is applied.
HMRC has provided a guidance note on Individual Protection 2014 which includes guidance on how to value savings.
The continuing reduction in the Lifetime Allowance creates major advice opportunities. HMRC estimates indicate that 30,000 clients may register for protection and a further 360,000 clients will have their future savings plans impacted by the Lifetime Allowance reduction to £1.25 million.