HMRC currently restricts the total value of pension benefits an individual can accumulate tax-free. The Standard Lifetime Allowance (LTA) is currently £1.25million, however, this will reduce to £1million from the 2016/17 tax year.
In order to protect pension savers who have, or will, accrue pension benefits in excess of the reduced LTA, HM Revenue & Customs (HMRC) has confirmed that two forms of protection will be available – Fixed Protection 2016 and Individual Protection 2016.
Fixed Protection 2016
- Fixed Protection 2016 provides an individual with a fixed, protected LTA of £1.25million.
- It will not be available to individuals who hold either Primary, Enhanced or Fixed Protection (including Fixed Protection 2014).
- All contributions to a Defined Contribution (DC) pension scheme must cease by 5 April 2016.
- Increases to benefits in a Defined Benefit (DB) pension scheme are permitted as long as they are based on CPI increases (other increases may be permitted if they are consistent with the pension scheme rules).
- There is no minimum fund/benefit value requirement in order to apply for Fixed Protection 2016.
Individual Protection 2016
- Individual Protection 2016 protects the value of an individual’s benefits as at 5 April 2016 up to the value of £1.25million.
- It will not be available to individuals who hold either Primary Protection or Individual Protection 2014.
- Individual Protection will be available to individuals who have accrued pension benefits valued at £1million or more as at 5 April 2016.
- Contributions and/or the accrual of benefits can continue.
Although both Fixed Protection 2016 and Individual Protection 2016 are very similar to the corresponding 2014 protections, one key point to note is that there are no application deadlines for these protections.
Individuals who wish to apply for Fixed Protection 2016 and/or Individual Protection 2016 will be able to do so via HMRC’s online self-service facility, however, this facility will not be available until July 2016. If an individual is successful in applying for Fixed Protection 2016/Individual Protection 2016, they will no longer receive a certificate, but instead they will receive a reference number from HMRC – it is this reference number that provides the guarantee of the protection in place.
If an individual wishes to take their pension benefits on or after 5 April 2016, but before HMRC’s online self-service facility is live, they will still need to apply for the appropriate protection as they will require HMRC’s reference number should they wish to rely on the protection and not incur a tax charge. If an individual does not have a reference number when they come to take their benefits, the benefit crystallisation event will be calculated using the LTA of £1million.
As there will be many individuals in this situation, HMRC has confirmed that an interim process will be established for the period April 2016 – July 2016. In this interim process, individuals will need to contact HMRC in writing with details of their intention to rely on the appropriate protection. If the individual is successful, a temporary reference number will be provided.
This temporary reference number is only valid until 31 July 2016. Once HMRC’s online self-service facility is live, individuals will be required to submit a full application in order to receive a permanent reference number.
Further information on applying for Fixed Protection 2016/Individual Protection 2016 via the interim process is expected shortly from HMRC.