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 new fund protection options were introduced on the same date to offer some transitional protection for people who think they will be affected by the 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 will fix 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 will work in much the same way as fixed protection 2012 and fixed protection 2014. 

If someone wants to apply for FP2016, 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 will be able to apply for FP2016. There is no requirement to have a certain amount of pension savings to apply for FP2016. 

FP2016 is likely to be suitable for individuals whose pension savings are expected to be above £1m 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:

  • 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’ after 5 April 2016. 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 2006. 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 losing the protection.

If an employer auto-enrols an existing or new employee into a new pension scheme and the individual fails to opt-out within one month, then FP2016 will be lost. 

To avoid this situation happening, changes were introduced from 1 April 2015 that allow an employer to make automatic enrolment optional where it has reasonable grounds to believe that an employee holds FP2016 (this also applies to anyone holding enhanced protection, FP2012 or FP2014). In practice, an employer can decide whether or not to include this as part of their automatic enrolment process and can also state what evidence they would need to confirm that FP2016 is held. For example, they may ask the employee to provide their permanent reference number from HMRC as evidence of their FP2016 status. 

If an employee joins their employer’s pension scheme under contractual enrolment (so there is no opt-out), then the employee could cancel the pension arrangement within the cancellation period so that their FP2016 is not lost. Alternatively, an employee could try to inform their employer before the joining process starts to inform them they have FP2016.  

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 £1m, 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. 

Applications for FP2016 can be made online

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 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. 

No paper protection certificate will be issued by HMRC for FP2016 and no application deadline will exist. However, it would be preferable 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. 

Note - if someone wants to apply for FP2016, they will need to have ceased contributions or stopped accruing benefits with effect from 6 April 2016. 

There was a period of three months between April 2016 and July 2016 where an interim process had to be followed for those wanting to rely on FP2016 when taking benefits before HMRC’s online application process became available. Anyone who used this interim process will have been given a temporary reference number by HMRC but this ceased to apply from 31 July 2016. Such individuals will have to make a full application for FP2016 using the online application process. This will result in a permanent reference number being issued, which will replace any temporary reference number that previously applied. If any pending interim applications were not processed by HMRC by 31 July 2016, HMRC will still process these but issue a permanent reference number rather than a temporary one.  

Temporary reference numbers will be in the format of AJ followed by four digits (eg, AJ1234). Permanent reference numbers will be in the format of FP16 followed by ten digits and one letter (eg, FP161234567890A).

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.

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

It’s worth pointing out that it is still possible for individuals to apply online for IP2014 up to 5 April 2017. To recap, IP2014 is only an option for those with pension savings (including any pensions already in payment) of more than £1.25m on 5 April 2014. IP2014 will protect 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.

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. 

The introduction of FP2016 and IP2016 offers some transitional protection to those that may be affected by the reduction in the SLA from 6 April 2016. Those intending to apply for either option, will need to decide which one will most benefit them and then take steps to apply online to HMRC.

Pensions Technical Services