The lifetime allowance for pension savings reduced from £1.5 million to £1.25 million on 6 April 2014. If your pension savings totalled more than £1.25 million on or after this date, you may have applied to protect your savings under the Individual Protection 2014 (IP2014) and Fixed Protection 2014 (FP2014) schemes. This guide explains these schemes.
Individual Protection 2014
Availability
Individual Protection 2014 (IP2014) was only available if the value of your pension savings on 5 April 2014 totalled over £1.25 million. However, you had to apply for this protection scheme on or before 5 April 2017, so this scheme is no longer open for new applicants.
Use the HMRC lifetime allowance checker
Level of protection
IP2014 gave you a protected lifetime allowance equal to the value of your pension savings on 5 April 2014 subject to an overall maximum of £1.5 million.
Can you continue saving into a pension?
If you have protection under IP2014 you can continue saving into a pension but any pension savings above the protected lifetime allowance will be liable for tax on the excess called the lifetime allowance charge.
Working out if this applies to you
Every time a payout from your pension schemes starts, its value is compared against your remaining lifetime allowance to see if there is additional tax to pay.
You can work out whether you are likely to be affected by adding up the expected value of your payouts.
You work out the value of pensions differently depending on the type of scheme you are in:
● For defined contribution pension schemes, including all personal pensions, the value of your benefits will be the value of your pension pot used to fund your retirement income and any lump sum.
● For defined benefit pension schemes, you calculate the total value by multiplying your expected annual pension by 20. In addition, you need to add to this the amount of any tax-free cash lump sum if it is additional to the pension. In many schemes, you would only get a lump sum by giving up some pension, in which case the value of the full pension captures the full value of your payouts. Note that certain tax-free lump sum benefits paid out to your survivors if you die before age 75 also use up lifetime allowance.
● Whenever you start taking money from your pension, a statement from your scheme should tell you how much of your lifetime allowance you are using up.
Fixed Protection 2014
Availability
Fixed Protection 2014 (FP2014) was aimed at people who expected their fund value to be in excess of the reduced Lifetime Allowance of £1.25 million at the time they took their benefits (known as the vesting date). However, the scheme was only open to people who did not have primary protection, enhanced protection or Fixed Protection 2012.
Applicants to the scheme had to stop saving into a pension or accruing benefits before 6 April 2014.
Applications to this scheme closed on 5 April 2014.
Level of protection
FP2014 gave you a protected lifetime allowance of £1.5 million.
Important! How to avoid losing your Fixed Protection
If you received protection under FP2014, this protection will be lost if you build up any new pension savings.
But there are steps that you can take to avoid losing this protection.
You need to:
● Make sure you opt out of automatic enrolment promptly – you usually have a one month window to do this and get your contribution refunded.
● Not make any further payments into any defined contribution pension scheme – if you do, you’ll automatically lose your protection and revert back to the current limit.
● Think carefully before continuing as an active member of a defined benefits scheme – opting out of active membership and becoming a deferred member significantly reduces the risk of losing your protection. You might wish to discuss your options with a financial adviser.
Take advice
The protection rules are complicated and the ways in which the protection can be lost differ depending on whether your retirement income (including lump sums) is provided from a defined contribution or a defined benefit pension scheme.
You might wish to seek professional financial advice or speak to your pension administrator if you think you are in danger of losing existing protection or you wish to apply for protection. Our guide on the Lifetime Allowance provides more details on the current protection schemes available.
To find out more about the different types of advice available, see our guide Retirement – why should I get advice?
This article is provided by the Money Advice Service.
