With the lifetime allowance reducing from £1.25 million to £1 million on 6 April 2016, what new protections will be available for members of a pension scheme to help protect the savings that they have already built up?
Fixed protection 16 ( FP16)
- There is no minimum value required to qualify.
- It fixes the lifetime allowance at £1.25 million. *
- No further contributions into a money purchase scheme are allowed from 6 April 2016 or FP16 will be lost.
- No benefit accrual in any defined benefit pension scheme. #
Individual Protection 16 (IP16)
- A minimum value of £1 million is required to qualify.
- It gives the individual a lifetime allowance that is equal to the capital value of their pension savings on 5 April 2016, but no higher than £1.25m.*
- Further contributions are allowed.
How do I apply for Fixed Protection 2016 or Individual Protection 2016?
Unlike previous versions of protection, scheme members can’t apply in advance, there are no paper applications and no certificates will be issued. An online digital service will be available in July 2016 for applications to be made.
Upon making an online application a member will receive a permanent reference number which they must provide to pension scheme administrators before a benefit crystallisation event.
Members planning on taking benefits between 6 April 2016 and July 2016 can apply for FP16 or IP16 using the interim application process (explained later). HMRC will write to the member with a temporary reference number to provide to their pension scheme administrator. The temporary reference number will only be valid until 31 July 2016.
It is important to note that scheme members who take benefits and rely on this interim process to protect their pension savings temporarily must make a full online application to ensure their pension savings continue to be protected from the lifetime allowance tax charge. Scheme administrators will not be able to use the temporary reference number in any reporting to HMRC and must wait until a permanent reference number is provided by the scheme member.
So therefore it appears that if a permanent number is not supplied to the scheme administrator in time for their reporting requirements they will be forced to report this as having no protection. The impact of this could be the member using more of their life time allowance than planned or even a tax charge for exceeding the standard lifetime allowance.
What is the interim process?
The interim process is to write to HMRC to ask for temporary reference number.
HMRC has provided letter templates which can be used to apply for interim protection. The interim process can only be used from 6 April 2016. HMRC will not process and will not retain any interim applications made before 6 April 2016.
Letters will need to be sent to –
Pension Schemes Services
Castle Meadow Road
The templates are available in the appendices to HMRC Newsletter 76 (https://www.gov.uk/government/publications/pension-schemes-newsletter-76-february-2016/pension-schemes-newsletter-76-february-2016)
* Whenever the standard lifetime allowance is lower.
# For members of a defined benefit scheme there is scope for benefits to increase in limited circumstances if within the legislation and scheme rules. This is generally applicable for deferred benefits. This is defined in more detail in PTM093500 and PTM093600.