Fixed protection 2016

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 legislation at the date of publication.

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The standard lifetime allowance (SLA) reduced from £1.25m to £1m on 6 April 2016. Two fund protection options were introduced on the same date to offer some transitional protection for people who think they will be affected by this SLA reduction. These are fixed protection 2016 (FP2016) and individual protection 2016 (IP2016). These FAQs look at the FP2016 option. There is a separate FAQ page covering IP2016.

FP2016 fixes an individual’s lifetime allowance at £1.25m. If the SLA increases above £1.25m sometime in the future, an individual’s FP2016 will stop and the higher SLA will then apply. FP2016  works in much the same way as fixed protection 2012 and fixed protection 2014. 

If someone wants to apply for FP2016 (or already has it), they will need to have stopped contributions or stopped accruing benefits with effect from 6 April 2016.

Any member of a registered pension scheme, who doesn’t already have primary protection, enhanced protection, fixed protection 2012 or fixed protection 2014 can apply for FP2016. There is no requirement to have a certain amount of pension savings. 

FP2016 is likely to be suitable for individuals whose pension savings are expected to be above the SLA when they take benefits on or after 6 April 2016, as any benefits they take would be tested against £1.25m rather than the SLA.  

There are a couple of scenarios where FP2016 could be held in conjunction with another form of fund protection. These are:

  • it’s possible for someone to hold FP2016 and have IP2016 as a back-up. The FP2016 will take precedence and IP2016 will only apply if the FP2016 is lost. It would only be possible to have FP2016 with IP2016 as a back-up where the value of pension savings at 5 April 2016 was more than £1m. 
  • it’s possible for someone to hold IP2014 and have 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. 

FP2016 can be lost in the following situations, if on or after 6 April 2016:

  • a new arrangement for an individual is set up under a registered pension scheme other than to accept a transfer of their existing benefits.
  • any transfer is made out of an individual’s existing arrangement(s) that is not a ‘permitted transfer’. Typical examples of permitted transfers are transfers from one money purchase arrangement to another or transfers from a defined benefit arrangement to a money purchase arrangement. The receiving scheme can be a UK registered pension scheme or a qualifying recognised overseas pension scheme (QROPS).
  • there is ‘benefit accrual’. For a money purchase arrangement, such as a personal pension, benefit accrual occurs if any personal, third-party or employer contributions are made after 5 April 2016. For a defined benefit arrangement, benefit accrual would occur where there is any yearly accrual of benefits that exceeds the ‘relevant percentage’.

If FP2016 is lost, it’s the individual’s responsibility to notify HMRC. They must do so within 90 days of the day in which they first could be reasonably expected to have known they had lost the protection.

Once FP2016 is lost, unless IP2016 is held as back-up, all subsequent BCEs for the member are tested by reference to the current standard lifetime allowance. BCEs before the protection is lost, are not affected and don’t have to be recalculated.  

If an employer has an auto-enrolment or auto re-enrolment duty for a new or existing worker, and that worker holds FP2016, the employer doesn’t have to auto-enrol or auto re-enrol them. They can chose not to apply the auto-enrolment or re-enrolment duty to that worker.

The employer needs to have reasonable grounds for believing that the worker has FP2016 and there must be evidence to back up this belief. The employer may require the worker to provide their permanent reference number from HMRC as evidence of their FP2016 status.

If the employer isn’t aware that the worker has FP2016, or just decides to go ahead and auto-enrol the worker anyway, so long as the worker opts out within the opt-out period of one month, they will be treated as never having joined the scheme, and the FP2016 will not be lost.

If a worker joins their employer’s pension scheme under contractual enrolment (where there is no opt-out), the worker would lose FP2016 unless they cancel the arrangement within the 30 day cooling-off period. Alternatively, the worker could inform the employer of their FP2016 before the contractual joining process starts, to make sure no new arrangement is established for them.

This auto-enrolment and auto re-enrolment exception also applies to workers with primary, enhanced, individual (2014 and 2016) and fixed (2012, 2014 and 2016) protections.

The deduction of a pension debit from an individual’s pension arrangement will not result in the loss of FP2016 so the remaining benefits will continue to be protected. If an individual decides to make further pension savings to build up their funds again after the debit then FP2016 would be lost as this would be classed as ‘benefit accrual’.

An ex-spouse or ex-civil partner with FP2016 who receives a pension credit transfer could lose their fund protection if the transfer is made to a new pension arrangement in their name as this would not be classed as a permitted transfer. If a transfer is made to an existing pension arrangement in the ex-spouse’s or ex-civil partner’s name then:

  • if the transfer is to a money purchase arrangement, FP2016 would not be lost. 
  • if the transfer is to a defined benefit arrangement, FP2016 may be lost but this would only be determined when the ‘benefit accrual’ for the tax year the transfer is made is calculated for the receiving arrangement. 

 

When an individual takes their pension benefits with FP2016, they will be tested against £1.25m rather than the SLA of £1.03m*, and the amount crystallised will be recorded as a percentage of £1.25m. If no tax-free cash protection applies, the maximum tax-free cash available will be the lower of: 

  • 25% of £1.25m, and 
  • 25% of the remaining fund. 

*The SLA in 2018/19 is £1.03m and £1.055m in 2019/20.

FP2016 takes effect from:

  • 6 April 2016, or
  • the date that FP2016 becomes active if it was held as a back-up to IP2014 and the IP2014 is lost. 

To expand on the third bullet point, FP2016 takes effect from 6 April 2016 irrespective of the date that it’s actually applied for. As a result, there could be situations where a benefit crystallisation event (BCE) has taken place on or after 6 April 2016 and before FP2016 has been applied for. See What if benefits are taken before fixed protection 2016 is applied for? for more information.

Applications for FP2016 can be made online(Opens new window)(Opens new window)(Opens new window)(Opens new window)

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 above link. 

A protection reference number will be provided by HMRC (no paper certificate will be issued) and this number will need to be given to a pension scheme by an individual each time benefits are being taken where FP2016 is held. Reference numbers will be in the format of FP16 followed by ten digits and one letter (eg, FP161234567890A).

There is no closing date for applications for FP2016, however it would make sense for individuals to apply to HMRC for FP2016 before they take their pension benefits so that any benefit crystallisation event can be calculated assuming the correct level of lifetime allowance.

Although there is no deadline for applications for FP2016, anyone wishing to apply for it still had to have stopped contributions or stopped accruing benefits with effect from 6 April 2016. In fact, none of the events detailed under Can someone lose FP2016? may have occurred since 6 April 2016, in order to apply for FP2016.

A protection reference number for FP2016 will not be issued by HMRC if it is being applied for as a back-up to IP2014. HMRC will instead inform someone if their application for FP2016 as a back-up has been successful. An FP2016 protection reference number will only subsequently be issued if the other form of fund protection is lost and the FP2016 becomes active.

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

There is no set end date for someone to apply for FP2016 although it would be preferable for fund protection to be in place before any benefits are taken. Irrespective of the date that FP2016 is applied for, the protection is effective from 6 April 2016 (unless FP2016 is being held as a back-up to another form of fund protection, in which case it becomes effective when the other protection is lost or given up). 

There may be situations where a benefit crystallisation event (BCE) has taken place on or after 6 April 2016 but before FP2016 has been applied for. Where this BCE was tested against the standard lifetime allowance rather than the £1.25m lifetime allowance under FP2016, it's possible to subsequently re-visit the BCE to recalculate the figures based on a £1.25m lifetime allowance. 

This, however, may cause an issue where a member has taken protected tax-free cash (PTFC) post 5 April 2016 and then subsequently applies for FP2016, as the PTFC may have been overpaid. This will result in the overpayment becoming an unauthorised payment and therefore subject to a tax charge. 

Example:

Jill applied for FP2016 fixing her SLA at £1.25m. One of her pension schemes has PTFC of £80,000 and a fund of £120,000 on 5 April 2006. 

On taking pension benefits in March 2017 from this fund, when the SLA is £1m, its value had increased to £160,000.

Jill’s tax-free cash in March 2017 is originally calculated as:

(PTFC on 5/4/06 x £1.8m* / SLA in 2006/07) +

(25% x (current value – (fund on 5/4/06 x current SLA / SLA in 2006/07)))

(£80,000 x £1.8m/£1.5m) + (25% x (£160,000-(£120,000x1/1.5)))

= £96,000 + (25% x (160,000-£80,000))

= £96,000 + £20,000

= £116,000

She then applies for FP2016 in May 2018 and the ordinary tax-free cash protection is recalculated as: 

(PTFC x (£1.8m / SLA in 2006/07)

PLUS

(25% x (current value - (fund on 5/4/06 x (greater of £1.25m or the current SLA) / SLA in 2006/07)))

(£80,000 x £1.8m/£1.5m) + (25% x (£160,000 – (£120,000 x £1.25m/£1.5m)))

= £96,000 + (25% x (£160,000 - £100,000))

= £96,000 + £15,000

= £111,000

Jill has received £5,000 tax-free cash more than she should have. This £5,000 will be an unauthorised payment.

Since tax year 2018/19, the SLA is increased in line with Consumer Prices Index (CPI) each tax year based on the CPI figure in the year to the previous September. Where 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. For tax year 2018/19, the SLA is £1.03m and for tax year 2019/20, the SLA is £1,055m.

Once the SLA increases above £1.25m, FP2016 will no longer apply.

Pensions Technical Services