Individual protection 2016

IP2016 is only an option for those with pension savings (including any pensions already in payment) of more than £1m on 5 April 2016.

Prior to 6 April 2024, people who applied for IP2016 were given a protected lifetime allowance equal to the lower of:

• their pension savings at 5 April 2016, and
• £1.25m

The protected lifetime allowance is quoted as a monetary amount and won’t change over time. 

From 6 April 2024, individuals who hold IP2014 and IP2016 will see their lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA) adjusted to reflect their protected amount as follows:

IP2014

An individual with IP2014 will have a LSA that’s the lower of:

• 25% of the protected amount, and
• £375,000.

Their LSDBA will be the lower of:

• the protected amount, and
• £1,500,000.

IP2016

An individual with IP2016 will have a LSA that’s the lower of:

• 25% of the protected amount, and
• £312,500

Their LSDBA will be the lower of:

• the protected amount, and
• £1,250,000.

It is possible for those with IP2016 to make further pension contributions or accrue additional defined benefit rights after 5 April 2016. However, these additional pension savings may be taxable when benefits are taken if they exceed an individual’s remaining LSA and/or LSDBA.

IP2016 is available to individuals:

• with total pension savings on 5 April 2016 valued at more than £1m,
• with no existing fund protection,
• as a back-up to enhanced protection where primary protection or IP2014 isn’t already held as a back-up,
• as a back-up to FP2012 or FP2014 where IP2014 isn’t already held as a back-up,
• as a back-up to FP2016. 

In other words, it's not available if someone has:

• primary protection,
• enhanced protection with primary protection as a back-up,
• enhanced protection with IP2014 as a back-up, 
• FP2012 with IP2014 as a back-up, 
• FP2014 with IP2014 as a back-up.

If IP2016 is held as a back-up to enhanced protection or one of the fixed protection options, the enhanced or fixed protection will take precedence. If either enhanced protection or fixed protection is lost, IP2016 will apply. It is only possible to have IP2016 as a back-up where the value of benefits at 5 April 2016 was more than £1m. 

When an individual takes their benefits, the relevant lump sum* will reduce the individual’s adjusted LSA and LSDBA, rather than the standard LSA and LSDBA. 

*relevant lump sum means:

For LSA:

• pension commencement lump sums
• the tax-free element of any uncrystallised funds pension lump sums, and
• stand-alone lump sums.

For LSDBA:

• all of the above, plus
• any serious ill-health lump sums, plus
• all lump sum death benefit payments, except charity lump sum death benefit payments and trivial commutation lump sum death benefits.

If no tax-free cash protection applies, the maximum tax-free cash available should be calculated as the lower of: 

• 25% of the adjusted LSDBA, and
• 25% of the remaining fund. 

IP2016 takes effect from: 

• 6 April 2016, or
• the date that IP2016 becomes active if it was held as a back-up to enhanced protection or one of the fixed protection options and that fund protection is lost. 

To expand, where not held as back up, IP2016 takes effect from 6 April 2016 irrespective of the date that it’s actually granted. As a result, there could be situations where a benefit crystallisation event (BCE) has taken place between  6 April 2016 and 5 April 2024 inclusive, but before IP2016 has been granted. Where the BCE was tested against the SLA rather than the IP2016 protected amount, it is possible to re-visit the BCE to recalculate the figures based on the protected amount under IP2016. It’s not clear from the legislation and supporting guidance whether this will affect RBCEs and the LSA and LSDBA from 6 April 2024.

The IP2016 option could be of benefit to:

• anyone who wouldn’t receive another form of benefit from their employer if they had chosen to opt out of any further pension saving or benefit accrual after 5 April 2016. If their employer wasn’t willing to offer an alternative benefit, such as higher pay, then it may be better for any employer contributions or benefit accrual to continue to be made, even though any additional pension savings could be subject to a lifetime allowance charge or tax at marginal rate, when benefits are eventually taken. See below for more information
• anyone who wants to continue making further pension savings after 5 April 2016, even though they may receive a protected lifetime allowance lower than the £1.25m lifetime allowance available through FP2016.

Individuals with individual protection who continue to accrue benefits or pay contributions may find that they end up with benefits in excess of their protected amount. This would lead to a tax charge of some sort, when the excess benefits are taken:

• if the excess benefits are taken before 6 April 2023 -   a lifetime allowance tax charge,
• if the excess is taken in 2023/24 – tax at marginal rate on the excess amount, or 
• from 6 April 2024, we expect that any relevant lump sum that exceeds the individual’s remaining adjusted LSA/LSDBA will be chargeable to tax at their marginal rate.

Pension benefits valued at 5 April 2016

The value of pension savings at 5 April 2016 can be split into four different categories:

• pensions that someone was receiving before 6 April 2006,
• pensions put into payment after 5 April 2006 but before 6 April 2016 along with certain tax-free lump sums received in the same period,
• uncrystallised funds,
• pension savings in certain overseas pension schemes.

Different valuation methods apply to each different category and more information on each method can be found here. The total value of all pension savings at 5 April 2016 across all four categories will be the amount protected under IP2016.

Please note providers were only required under legislation to provide valuations at 5 April 2016 for up to four years from that date. Since 6 April 2020, there is no statutory obligation on scheme administrators to provide valuations at 5 April 2016.

Pension sharing orders and IP2016

If a pension debit is made to comply with a pension sharing order on divorce, a person’s protected lifetime allowance under IP2016 may be reduced or even cease to apply. The onus is on an individual to tell HMRC if they have become subject to a pension debit. HMRC will then either: 

• confirm that the protected amount is reduced, or
• revoke IP2016 if the value of an individual’s pension rights following the pension debit fall below £1m at the time the pension sharing order takes effect. 

Where a pension debit is made on or after 6 April 2017, the value of the debit is reduced by 5% for each full tax year elapsed between 5 April 2016 and the date of the pension debit. The resulting amount is then deducted from the amount protected under IP2016. It will then be clear whether the IP2016 protected amount will be reduced or if IP2016 will be lost.

Further information about reducing or revoking IP2016 due to a pension debit can be found in HMRC guidance here.

Application process

Applications for IP2016 can be made online. The deadline is 5 April 2025.

Anyone wanting to use the online service will need to have an HMRC Online Services Account and further information on signing in or creating an account is available in the same link.

A protection reference number will be provided by HMRC and this number will need to be given to a pension scheme by an individual each time benefits are being taken where IP2016 is held.

No paper protection certificate will be issued by HMRC for IP2016. It would be preferable for individuals to apply to HMRC for IP2016 before they take their pension benefits so that the correct LSA and LSDBA are known when the first relevant benefit crystallisation event (RBCE) takes place.

Protection reference numbers will be in the format of IP16 followed by ten digits and one letter (e.g., IP161234567890B). 

A protection reference number for IP2016 will not be issued by HMRC if it is being applied for as a back-up to enhanced protection or one of the fixed protection options. HMRC will instead inform someone if their application for IP2016 as a back-up has been successful. An IP2016 protection reference number will only subsequently be issued if the other form of fund protection is lost and the IP2016 becomes active.

An online scheme administrator look-up service is available on HMRC’s website here.   This allows scheme administrators to check the validity of a protection reference number supplied by a customer or scheme member.

Summary

Further information on IP2016 can be found in this HMRC guidance.