Individual 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.

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 IP2016 option. There is a separate FAQ page covering FP2016. 

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

People who apply for IP2016 will be given a protected lifetime allowance equal to the amount of their pension savings at 5 April 2016, capped at an overall maximum of £1.25m. The protected lifetime allowance will be quoted as a monetary amount and won’t change over time. If the SLA increases above the protected amount, the IP2016 protection would cease to apply and the higher SLA will become relevant.

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 are likely to 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). 

IP2016 is available for someone: 

  • 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 individual protection 2014 isn’t already held as a back-up.
  • as a back-up to fixed protection 2012 or 2014 where individual protection 2014 isn’t already held as a back-up.
  • as a back-up to fixed protection 2016. 

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

  • primary protection.
  • enhanced protection with primary protection as a back-up.
  • enhanced protection with individual protection 2014 as a back-up.
  • fixed protection 2012 with individual protection 2014 as a back-up.
  • fixed protection  2014 with individual protection 2014 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, they will be tested against their IP2016 protected amount rather than the SLA of £1m, and the amount crystallised will be recorded as a percentage of the protected lifetime allowance. If no tax-free cash protection applies, the maximum tax-free cash available should be calculated as the lower of: 

  • 25% of the protected lifetime allowance, and
  • 25% of the remaining fund. 

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 when benefits are eventually taken.
  • 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, and could incur a lifetime allowance charge on the additional savings or benefit accrual. 

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. 

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. 

Applications for IP2016 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 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 and no application deadline will exist. However, it would be preferable for individuals to apply to HMRC for IP2016 before they take their pension benefits so that any benefit crystallisation event can be calculated assuming the correct level of lifetime allowance.

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 IP2016 when taking pension 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 IP2016 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 four digits followed by AJ (eg, 1234AJ). Permanent reference numbers will be in the format of IP16 followed by ten digits and one letter (eg, 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.

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