Fixed and Individual Protection 2016
By Dale Wadsworth, Business Development Manager
What you need to know
On 6 April 2016, the lifetime allowance for pension savings will be reduced from £1.25 million to £1 million. For pension savers who think they will be affected by the change, the Government will be introducing two new forms of protection – FP16 and IP16. Here we take a look at the four key points around the benefits and implications of the protections for your clients.
#1 Fixed Protection 2016 (FP16)
FP16 will give anyone who applies for it a protected lifetime allowance of £1.25 million. Anyone with savings in a registered pension scheme can apply for FP16, provided they do not have certain pre-existing forms of lifetime allowance protection such as enhanced protection, primary protection or either existing variant of fixed protection.
Once someone has been given FP16 they must stop accruing further pension benefits. For any defined contribution schemes this means preventing any further contributions being paid. For defined benefits schemes, the accrual of additional benefits will invalidate FP16 if the value of the individual’s pension increases beyond a “relevant percentage” in any year. There are also restrictions on the types of pension transfers someone with FP16 can make.
Something your client may need to be aware of
If someone with FP16 breaches any of these conditions they will lose their protection, and will need to inform HM Revenue & Customs (HMRC). If they don’t inform HMRC a financial penalty will be incurred.
#2 Giving up existing protection
It is possible to give up some existing forms of lifetime allowance protection and apply for FP16 instead. However, as a general rule anyone with one of the existing forms of protection is better off than they would be if they had FP16, and primary and individual protection cannot be given up.
For someone with enhanced protection, or one of the existing forms of fixed protection, they may be better off taking FP16 if the value of their pension savings has fallen below the current standard lifetime allowance of £1.25 million, without a reasonable likelihood of exceeding that amount given assumptions about investment growth over time.
Another thing your client may need to be aware of
Once given up it will not be possible to re-apply for existing protection, so the decision to do so needs to be considered carefully. In addition, if one of the existing forms of fixed protection is lost without HMRC being informed within 90 days a financial penalty will apply.
#3 Individual Protection 2016 (IP16)
IP16 will give those who successfully apply for it a personal lifetime allowance equal to the value of their pension savings on 6 April 2016, subject to a cap of £1.25 million.
Someone with IP16 can continue to pay pension contributions without losing their protection, but any savings they accumulate above their personal lifetime allowance will be subject to a lifetime allowance tax charge. They cannot have primary protection at the point they apply, but they can have any of the other existing types of lifetime allowance protection (in which case their existing protection takes precedence until given up or revoked).
#4 Should FP16 and IP16 both be applied for?
Individuals can apply for both FP16 and IP16. It may be worthwhile doing so, even though the level of protection under FP16 will usually be higher, since at the very least IP16 will give those who apply for it a “safety net” in the event that they lose FP16.
The information given above is based on our understanding of the proposed changes. The information is based on current law and HM Revenue & Customs (HMRC) practice, which is subject to change.
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