Individual and Fixed Protection 2014 schemes for pension savings
The lifetime allowance for pension savings reduced from £1.5 million to £1.25 million on 6 April 2014. If your pension savings was more than £1.25 million on or after this date, you may be able to apply to protect your savings under the Individual Protection 2014 (IP2014) and Fixed Protection 2014 (FP2014) schemes. This guide explains these schemes and how to apply for pension savings protection.
Individual Protection 2014
Individual Protection 2014 (IP2014) is only available if the value of your pension savings on 5 April 2014 was over £1.25 million.
If you have applied for protection in the past on other occasions when the lifetime allowance was reduced, you might not be eligible to apply for protection again now.
Level of protection
IP2014 will give you a protected lifetime allowance equal to the value of your pension savings on 5 April 2014 subject to an overall maximum of £1.5 million.
Can you continue saving into a pension?
Yes, you can continue saving into a pension but any pension savings above the protected lifetime allowance will be liable for tax on the excess called the lifetime allowance charge.
Working out if this applies to you
Every time a payout from your pension schemes starts, its value is compared against your remaining lifetime allowance to see if there is additional tax to pay.
You can work out whether you are likely to be affected by adding up the expected value of your payouts.
You work out the value of pensions differently depending on the type of scheme you are in:
● For defined contribution pension schemes, including all personal pensions, the value of your benefits will be the value of your pension pot used to fund your retirement income and any lump sum.
● For defined benefit pension schemes, you calculate the total value by multiplying your expected annual pension by 20. In addition, you need to add to this the amount of any tax-free cash lump sum if it is additional to the pension. In many schemes, you would only get a lump sum by giving up some pension, in which case the value of the full pension captures the full value of your payouts. So you’re likely to be affected by the lifetime allowance change in 2015-16 if you’re on track for a final salary pension (with no separate lump sum) of more than £62,500 a year or a salary-related pension over £46,875 plus the maximum tax-free cash lump sum.
● Note that certain tax-free lump sum benefits paid out to your survivors if you die before age 75 also use up lifetime allowance.
● Whenever you start taking money from your pension, a statement from your scheme should tell you how much of your lifetime allowance you are using up.
How to apply
There is a three-year period in which you can apply for IP2014 (6 April 2014 to 5 April 2017).
You will have up to 5 April 2017 to submit your IP2014 application to HMRC.
The protection rules are complicated and the ways in which the protection can be lost differ depending on whether your retirement income (including lump sums) is provided from a defined contribution or a defined benefit pension scheme.
You might wish to seek professional financial advice or speak to your pension administrator when deciding whether to apply for protection and working out when and how to take benefits from your pension scheme.
Fixed Protection 2014
Fixed Protection 2014 (FP2014) was only available if the value of your pension savings on 5 April 2014 was over £1.25 million.
The scheme was only open to people who did not have primary protection, enhanced protection or Fixed Protection 2012.
Applicants to the scheme had to stop saving into a pension or accruing benefits before 6 April 2014.
Applications to this scheme closed on 5 April 2014.
Level of protection
FP2014 gave you a protected lifetime allowance equal to the value of your pension savings on 5 April 2014 - subject to an overall maximum - of £1.5 million.
Important! How to avoid losing your Fixed Protection
If you received protection under FP2014, this protection will be lost if you build up any new pension savings. #
But there are steps that you can take to avoid losing this protection.
You need to:
● Make sure you opt out of automatic enrolment promptly – you usually have a one month window to do this and get your contribution refunded.
● Not make any further payments into any defined contribution pension scheme – if you do, you’ll automatically lose your protection and revert back to the current limit.
● Think carefully before continuing as an active member of a defined benefits scheme – opting out of active membership and becoming a deferred member significantly reduces the risk of losing your protection. You might wish to discuss your options with a financial adviser.