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Individual Protection 2014 – going, going…

Introduction 

“A-Day” on 6 April 2006 ushered in a new taxation regime for pensions, under the heading of “Pension Simplification”, (no sniggering at the back, please). 

Clearly, it is vital that those who had accrued pension benefits under the various tax regimes that existed before A-Day, were not penalised when drawing their benefits under the new regime, on or after A-Day.  Therefore, two types of ‘transitional protection’ were introduced on A-Day; namely, ‘Primary Protection’ (PP) and ‘Enhanced Protection’ (EP). 

Provided that the individual could meet the requirements to apply for each form of protection, it was possible to apply for either, or both.  The closing date for applications was 5 April 2009 (i.e. three years after A-Day).  Advisers will have understandably thought, “well, that’s that”, as far as protecting accrued pension benefits was concerned. 

Unfortunately, not so.  The global financial crisis of 2008 and beyond, and the resulting austerity measures of successive UK governments, precipitated a number of changes to the pensions tax system; largely, a reduction in both the Annual Allowance and the Lifetime Allowance (LTA) to ever lower levels. 

And with each government ‘tweak’ to the rules, new forms of protection were rolled-out, in order to protect pension savings that had been legally accrued under previously higher allowance levels. 

The reduction in the LTA from £1.5 million to £1.25 million on 6 April 2014 was accompanied by ‘Fixed Protection 2014’ and ‘Individual Protection 2014’.  Whereas the closing date for Fixed Protection 2014 was 5 April 2014, the period of time to apply for Individual Protection 2014 (IP14) mirrored that for PP and EP; namely, three years from 6 April 2014. 

This means that the closing date to apply for IP14 of 5 April 2017 is fast approaching, and the remainder of this article provides an overview of who can apply for IP14, what it protects, how your clients can apply for it, how to calculate if they have sufficient benefits in order to apply for it, and if IP14 can ever be lost. 

 

Who can apply for IP14? 

To be eligible for IP14, the total value of your client’s pension savings, calculated as at 5 April 2014, must be worth more than £1.25 million

The exact amount of their protected LTA is therefore based on the total value of their pension savings on 5 April 2014, but if this value exceeds £1.5 million, then their protected LTA is capped at £1.5 million. 

Your clients can still apply for IP14 if they already have any of the following:

  • Enhanced Protection; or
  • Fixed Protection (2012); or
  • Fixed Protection 2014; or
  • Fixed Protection 2016. 

If they have Fixed Protection 2016, it will become dormant, once they obtain IP14, (which takes effect from 6 April 2014). 

For all other protections, IP14 will stay dormant until your client loses, or gives up, their other protection, and they must tell HMRC in writing if this happens. It is not possible for them to apply for IP14 if they already have Primary Protection, (as they share many similarities). 

The crucial difference with IP14 over Enhanced and Fixed Protection is that your client can continue to contribute to their pension arrangement(s) whilst they hold it. However, as outlined below, they must pay tax on any monies taken from their pension(s) that exceed their protected LTA. 

 

What does IP14 protect? 

Applying for IP14 helps to protect pension savings accrued before 6 April 2014, from a LTA excess tax charge, subject to an overall maximum of £1.5 million

Any benefits taken in excess of your client’s protected LTA will attract an excess tax charge of either 55% or 25% of the excess, depending on whether the excess is taken as a lump sum or as pension income, respectively. 

Unlike EP, therefore, IP14 does not offer your client total protection from an excess tax charge. 

 

How to apply for IP14 

IP14 can only now be applied for online, via the following link; 

https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance 

And, unlike previous paper-based applications for protection, you will not be able to apply for IP14 on behalf of your client.  This is because your client must firstly open a personal account for HMRC online services, before they can start the IP14 application process. 

Your client will also need to know what their pension(s) were worth on 5 April 2014 and a breakdown of the overall amount (see below). 

If they don’t know this information, they can ask their pension scheme administrator to calculate it for them, and if they have more than one pension arrangement, they should add the relevant amounts from each arrangement together, to ascertain if the total exceeds £1.25 million, as at 5 April 2014. 

Additionally, as well as providing HMRC with some basic information, (that is, their name, date of birth and National Insurance number), they will also need to confirm that they did not hold Primary Protection as at 5 April 2014. 

Once the application has been successfully submitted by your client, the online system will confirm that they have IP14, giving details of the amount protected, and a unique reference number.  This information forms their IP14 ‘certificate’ and will be available for viewing via the online personal tax account that they opened at the start of the process. 

Benefits are then tested against their protected LTA whenever a ‘Benefit Crystallisation Event’ (BCE) occurs. BCEs occur whenever pension benefits are taken, (which includes certain lump sum benefits paid on your client’s death), or when they reach age 75. 

Whenever a BCE happens, your client should give their IP14 unique reference number to their pension scheme administrator(s). This will mean that their benefits are tested against their protected LTA, rather than the lower ‘standard’ LTA, (which is £1 million for the 2016/17 and 2017/18 tax years). 

 

How to calculate what the total value of your client’s pension savings are, as at 5 April 2014 

Your clients will need to provide HMRC with ‘amounts A to D’ (where applicable), and their ‘total relevant amount’. 

The ‘total relevant amount’ is the sum of the amounts A to D, (that is, A+B+C+D), as set out below;

 

AMOUNT A = the amount of any pensions already in payment before 6 April 2006, valued at 5 April 2014; 

AMOUNT B = the amount of any benefits crystallised between 6 April 2006 and 5 April 2014 inclusive, valued at 5 April 2014; 

AMOUNT C = the amount of any uncrystallised pension savings in UK registered pension schemes, valued at 5 April 2014; and 

AMOUNT D = the amount of any uncrystallised pension savings in ‘relieved non-UK pension schemes’, valued at 5 April 2014. 

Your client should ensure that these details are all included - and correct - because HMRC will reject applications with incomplete information, or if amounts A to D do not add up to the ‘total relevant amount’. 

 

Can IP14 ever be lost? 

Potentially.  Your client could only lose IP14 if either; 

• a pension debit, (that is, on divorce/pension sharing), reduces their protected LTA to below the level of the standard LTA; or 

• the standard LTA increases to a level greater than their protected LTA. 

If your client loses IP14, they will revert to the standard LTA and any further BCEs they undertake will be tested against this lower amount.  If the value of their BCEs exceeds the standard LTA, they will be liable for a tax charge on the excess, (as summarised earlier). 

However, HMRC will not revisit any BCEs that occurred before they lost IP14, or re-test them against the standard LTA. 

Your client has 60 days in which to tell HMRC about a pension debit; otherwise a penalty of up to £300 will be levied, with the possibility of additional penalties, if the information remains undelivered to them.

 

Conclusion 

IP14 was principally intended for those individuals who have accrued significant pension savings over their working lifetime, and are neither in a position to – nor want to - amend their employee benefits package, which is likely to include ongoing employer (and possibly employee) pension contributions. 

Given the further reduction in the standard LTA with effect from 6 April 2016, IP14 may be more appropriate for some of your clients now, as opposed to during 2014 and 2015; for example, those whose pension savings were only slightly above £1.25 million, as at 5 April 2014. 

However, with a closing date of 5 April 2017 and, depending upon the complexity of your client’s pension portfolio, (and the need to correctly calculate its value as at 5 April 2014), time is of the essence. 

 

James Jones-Tinsley is the Self-Invested Pensions Technical Specialist for Barnett Waddingham LLP 

 

[Sponsored article by Barnett Waddingham LLP]

 

Author: Andy Leggett
Posted: Thursday, March 02, 2017 | 7:52:15 AM


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