Individual protection 2014

These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of current legislation, which may change.

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The standard lifetime allowance (SLA) reduced from £1.5m to £1.25m from 6 April 2014. To coincide with this reduction in the SLA, HM Revenue and Customs (HMRC) introduced two types of fund protection called fixed protection 2014 and individual protection 2014. This information looks at the individual protection 2014 (IP2014) option as it is still possible for someone to apply to HMRC for this up to 5 April 2017.

Note – the SLA was reduced again from £1.25m to £1m from 6 April 2016. This introduced two further fund protection options called fixed protection 2016 and individual protection 2016. There are separate FAQ pages available on each of these options. 

IP2014 is only an option for those who had pension savings (including any pensions already in payment) of more than £1.25m on 5 April 2014.

IP2014 is available to someone: 

  • with no existing fund protection.
  • as a back-up to fixed protection 2012 or 2014.
  • as a back-up to enhanced protection where no dormant primary protection is held. Some people will have enhanced protection on its own and some will have enhanced protection with primary protection as a back-up if enhanced protection is lost. Those that have enhanced protection with no dormant primary protection as a back-up can apply for IP2014. 

It will not be available if someone has: 

  • primary protection.
  • enhanced protection with dormant primary protection. 

It is also possible for someone to hold IP2014 with FP2016 as a back-up. The IP2014 will take precedence and FP2016 will only apply if the IP2014 is lost. Realistically, IP2014 can only be lost if a pension sharing order is made on divorce and the pension debit reduces the value of the member’s benefits below £1.25m. In addition, FP2016 could only be valid providing there has been no ‘benefit accrual’ after 5 April 2016.   

IP2014 protects the value of a person’s pension savings on 5 April 2014 but the protection will be capped at the level of the 2013/14 SLA of £1.5m. Any pension savings in excess of £1.5m can’t be protected under IP2014, and would be subject to a lifetime allowance charge when pension benefits are subsequently taken. 

Those with IP2014 will have a protected lifetime allowance equal to the amount of their pension savings at 5 April 2014, capped at an overall maximum of £1.5m. The protected lifetime allowance will be quoted as a monetary amount and it won’t change over time. If the SLA increases above the protected amount, the IP2014 protection would cease to apply and the higher SLA will become relevant.

It will be possible for those with IP2014 to make further pension contributions or accrue additional defined benefit rights after 5 April 2014. However, these pension savings will be subject to a lifetime allowance charge when benefits are taken if they exceed an individual’s protected lifetime allowance (or the SLA, if higher).

Where IP2014 is held as a back-up to enhanced protection or one of the fixed protection options, then the enhanced or fixed protection will take precedence. If either enhanced protection or fixed protection is lost, then IP2014 will apply.

It is possible to apply to HMRC for IP2014 up to 5 April 2017. This lengthy period has been set to allow plenty of time for valuations at 5 April 2014 to be obtained as valuations are required as part of the application process. 

Applications for IP2014 can be made online here. The application will ask for: 

  • confirmation that the applicant doesn’t have primary protection. This includes having primary protection on its own or enhanced protection with dormant primary protection.
  • the value of the applicant’s pension savings at 5 April 2014.
  • the date and amount of any pension debit made since 6 April 2014 up to the date of making the IP2014 application.
  • the applicant’s full name, address, date of birth, National Insurance number and email address. 

Anyone wanting to use HMRC's online application service (made available from 28 July 2016) will need to have an HMRC Online Services Account. Further information on signing in or creating an account is available in the above link.  

It is expected that an online scheme administrator look-up service will be available on HMRC’s website by the end of 2016. This will allow scheme administrators to check the validity of a reference number supplied by a customer or scheme member. 

Anyone who applied for IP2014 before HMRC's online application process became available (28 July 2016) will have a paper certificate from HMRC confirming they have IP2014. 

An IP2014 certificate or reference number will be held if someone has applied for IP2014 on its own, which the person will then be able to use each time they take any pension benefits. The protected amount will be the actual value of pension savings at 5 April 2014. Where this is more than £1.5m, the protected amount should be capped at £1.5m. Any benefits taken will be quoted as a percentage of the protected lifetime allowance rather than the SLA.

If IP2014 is applied for where someone already has enhanced protection, fixed protection 2012 or fixed protection 2014, then HMRC will confirm to the applicant that their IP2014 application has been accepted. An IP2014 reference number won’t be issued unless the IP2014 option becomes active and this will happen only if the other form of protection is lost.

The value of pension savings at 5 April 2014 can be split into four different categories: 

  1. pensions that someone was receiving before 6 April 2006.
  2. pensions put into payment after 5 April 2006 but before 6 April 2014 along with certain tax-free lump sums received in the same period.
  3. uncrystallised funds.
  4. pension savings in certain overseas pension schemes. 

For more information on how to calculate values under each category you can refer to HMRC’s individual protection guidance notes at:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm094300

There are two scenarios to look at for calculating tax-free cash for a pension arrangement where IP2014 applies. These are: 

  1. 25% tax-free cash is available for a pension arrangement. This is calculated as 25% of the protected amount (or the SLA if it increases above this).
  2. there is ordinary tax-free cash protection for a pension arrangement. This means that the tax-free cash at 5 April 2006 was more than 25%. This is calculated as:

Revalued protected TFC + 25% of post 5/4/06 fund growth = Total TFC available

This translates as:

(Protected TFC x £1.8m/ SLA in 2006/07) + (25% x (current fund – (fund at 5/4/06 x personalised LTA*/ SLA in 2006/07))) = Total TFC available

* this is capped at £1.5m if the personalised LTA value on an HMRC IP2014 protection certificate is more than this. 

If a pension debit is made to comply with a pension sharing order, a person’s protected lifetime allowance under IP2014 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: 

  • issue a replacement certificate if the protected amount is reduced, or
  • revoke the IP2014 certificate if the value of a person’s pension rights following the pension debit fall below £1.25m at the time the pension sharing order takes effect. 

It is worth noting that, where a pension debit is made on or after 6 April 2015, the value of the pension debit is reduced by 5% for each full tax year elapsed since 2013/14 when calculating the remaining protected amount under IP2014.

The IP2014 option could be of benefit to: 

  • anyone who wouldn’t receive another form of benefit from their employer if they chose to opt out of any further pension saving or benefit accrual after 5 April 2014. 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 savings could be subject to a lifetime allowance charge when benefits are eventually taken.
  • anyone who wants to continue their pension savings after 5 April 2014, even though they could incur a lifetime allowance charge on the additional savings or benefit accrual. 

The SLA will be increased in line with Consumer Prices Index (CPI) increases from 6 April 2018. If the new level of SLA is not a multiple of £100 using the relevant CPI increase, it will be increased up to the next multiple of £100.

If at any time, the SLA increases above the protected amount held under any of the fixed or individual protection options, the SLA will apply. This is, initially, only going to be relevant for those with a protected amount under IP2016.

For example, assume the increase in CPI from September 2016 to September 2017 is 2%. This would mean that the SLA for the 2018/19 tax year will be £1,020,000. So, anyone with a protected amount under IP2016 of less than this amount would see this amount replaced by the 2018/19 SLA of £1,020,000 instead. 

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