The lifetime allowance is the maximum amount of tax privileged pension savings an individual can build up in registered pension schemes before they incur an additional tax charge. For the 2020/21 tax year the lifetime allowance is £1,073,100.
Individual Protection 2016 allows someone whose pension pots were valued at more than £1 million on 5 April 2016 (the lifetime allowance between 6 April 2016 and 5 April 2018) to protect their pensions from an additional tax charge subject to an overall maximum of £1.25 million. It gives them a personalised lifetime allowance based on the value of their pension savings as at 5 April 2016.
An example of Individual Protection 2016
As an example, someone with pensions worth £1.2 million on 5 April 2016 will be able to have £1.2 million as their personalised lifetime allowance through Individual Protection 2016. Someone with pensions worth £1.3 million will be able to have £1.25 million as their personalised lifetime allowance, helping them to reduce their lifetime allowance tax charge.
This personalised lifetime allowance will not increase unless the standard 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.
Individual Protection 2016 VS Fixed Protection 2016
A crucial difference between Individual Protection 2016 and Fixed Protection 2016 is that with the former an individual can still be an active member of a pension scheme, whereas with the latter the individual needs to have stopped contributing to a pension or accruing benefits as from 6 April 2016. Other differences are that no minimum pension value is required to support an application for Fixed Protection 2016 and under Fixed Protection 2016 the personalised lifetime allowance is fixed at £1.25m.
Individual Protection 2016 will be useful for individuals who intend to continue contributing to a pension scheme as it allows them to keep a lifetime allowance greater than the standard lifetime allowance that applies.
Individual Protection 2016 may also be beneficial to individuals 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 individuals are not able to renegotiate their employment package, for example in order to receive their employer contribution in a more tax efficient format.
It is possible to apply for Individual Protection 2016 if an individual already has fixed protection. Individuals can apply for both Fixed Protection 2016 and Individual Protection 2016 and, where this is the case, Fixed Protection 2016 will take precedence. If Fixed Protection 2016 is lost, the individual will revert to Individual Protection 2016.
Applying for Individual Protection
Anyone wishing to apply for Individual Protection 2016 has to do so online and 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. Individuals will no longer receive paper certificates with their lifetime allowance protection details.
There is no deadline for applying for Fixed Protection 2016 and Individual Protection 2016 but, where Individual Protection 2016 is concerned, scheme administrators are no longer obliged to supply the data to support the application to HMRC; it will be given at their discretion. In view of this, those individuals who are contemplating applying for Individual Protection 2016 should consider doing so as soon as possible.
Guidance to help individuals who wish to apply for lifetime allowance protection has been published by HMRC on the Government website. HMRC has also produced a new guide for valuing pensions for Individual Protection 2016 purposes.
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. There will be no tax consequences provided they have not lost their protection.
However, if the individual has further benefits to crystallise (i.e. they wish to draw more pension from their pots) 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 either be delayed or the lifetime allowance charge will be applied if applicable.
Tilney can help with your pensions
The lifetime allowance and Individual Protection 2016 are areas where financial advice is wise. At Tilney we have a nationwide team of expert financial planners supported by pension technical experts like Nigel. We offer free initial consultations so you can talk through your specific circumstances and find out how a financial planner can help you with your pensions and wider finances.
This article is based on our understanding of current legislation and is solely for information purposes. It is not intended to be, and should not be construed as advice. Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.
Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.
This article was previously published on Tilney prior to the launch of Evelyn Partners.