As a consequence of reducing the standard lifetime allowance to £1 million from 6 April 2016 new protections are available to members who could be impacted by the reduction (as they have been on previous occasions since the lifetime allowance was introduced on 6 April 2006).
From 6 April 2016, there will be two more HMRC lifetime allowance protections available to members, these are:
- Fixed protection 2016; and
- Individual protection 2016.
Members need to consider whether to apply for the new HMRC protections in order to act to protect themselves from a possible tax charge even if they are not yet nearing retirement.
If members hold enhanced protection or fixed protection but the value of their pension benefits did not qualify them for primary protection or individual protection 2014 they need to consider whether they now have sufficient pension benefits to apply for individual protection 2016, which will remain dormant while the existing protection remains valid.
Legislation for these latest protections will be delivered in the Finance Bill 2016 (later the Finance Act 2016), and will become effective from 6 April 2016.
HMRC Online Applications to HMRC
The Finance Act 2016 will be laid after 6 April 2016 and as a result HMRC will be prevented from processing applications for fixed protection 2016 in advance of 6 April 2016. Applications for fixed protection 2016 and individual protection 2016 will be online using a new HMRC online self-service tool, which is expected to be available to members or their authorised representative from July 2016.
For the 2016 protections HMRC will not be issuing a paper protection certificate, instead they will electronically provide a protection reference number and for individual protection 2016 confirmation of the member’s individual lifetime allowance. Members will need these when they come to retire. HMRC are also exploring ways in which administrators of pension schemes will be able to check the protection status of one of their members.
The information needed by HMRC to process the application will be similar to that in respect of the previous declarations for fixed protection 2012, fixed protection 2014 and individual protection 2014. Fixed protection 2016 will have precedence over individual protection 2016 if both are being applied for.
HMRC has indicated that there will no longer be an application deadline for obtaining fixed protection 2016 and individual protection 2016 (unlike the 5 April 2017 deadline for individual protection 2014).
There will be issues for members wishing to take benefits after 5 April 2016 but before they receive their protection reference number from July 2016 onwards. In view of this, HMRC has come up with an interim process (see HMRC Newsletter 73), whereby HMRC will provide a letter to pass onto a scheme administrator in advance of the online facility becoming available.
Members will need to have this latest protection before they take their benefits if they want this to be applied when assessing if any lifetime allowance charge is due. Without a HMRC letter or confirmation of the protection reference number SPPA will put benefits into payment assuming a standard lifetime allowance of £1 million for 2016/17, this could also mean the payment of a smaller lump sum.
Where benefits crystallise, on or after 6 April 2016, without protection and a protection reference number is issued after this date any reduction to the pension or lump sum will be revised to take the relevant lifetime allowance protection into consideration.
The link to Newsletter 73 is set out below:
There is also some useful information in Newsletter 72:
Fixed Protection 2016
Members can apply for fixed protection 2016, whether benefits exceed £1 million or not, as long as they do not already have one of the following protections:
- Enhanced protection
- Primary protection
- Fixed protection 2012
- Fixed protection 2014
For fixed protection 2016 to remain valid there can be no benefit accrual after 5 April 2016. Fixed protection 2016 is lost on the day benefit accrual occurs. Benefit accrual includes:
- any pension contributions paid to a defined contribution scheme, this includes a Money Purchase AVC Scheme; or
- pension growth in scheme benefits that exceed a relevant percentage.
To avoid the risk of losing fixed protection 2016, certain members may wish to opt out of their pension scheme before 6 April 2016. Members are advised to take Independent Financial advice before doing so.
Once a member has fixed protection 2016 (and it remains valid) their lifetime allowance is fixed at £1.25 million.
Importantly, for members who are currently contributing to the pre 2015 scheme and have Tapered Protection, HMRC fixed protection will be lost when they move and contribute to the 2015 Scheme.
Until the Finance Act 2016 comes into force members can find further details about fixed protection 2014 (similar to fixed protection 2016) at: http://www.hmrc.gov.uk/manuals/ptmanual/ptm093000.htm.
One of the conditions for retaining fixed protection 2016 is that a member does not trigger benefit accrual on or after 6 April 2016. This is where future accrual in their pension scheme exceeds the value of benefits at 5 April 2016 indexed in line with inflation in the 12 months prior to September 2015. As this value was negative (-0.1% for the year to September 2015) members accruing benefits from 6 April 2016 will more than likely incur benefit accrual immediately.
To retain the right to fixed protection 2016, members may therefore decide to opt out of their pension scheme before 6 April 2016. Members wishing to apply for fixed protection 2016 will need to start thinking about whether they want to leave the Scheme (and any other pension schemes) well before 5 April 2016.
An election to opt out of the Scheme takes effect from the first of the month, following the month in which it is given, therefore to ensure they opt out in time, members should consider an opt out no later than the end of March 2016. Members should contact their employer in March 2016 to ensure this would have an effective date of 1 April 2016.
With regards to ceasing contributions to money purchase (defined contribution) arrangements, members may need to start the process of ceasing contributions earlier than March 2016. This is because a money purchase contribution received by a scheme on or after 6 April 2016 will constitute further accrual, which will invalidate fixed protection 2016.
Before applying to opt out of the Scheme members should first visit the HSC Pension Service website and consider the benefits that members would lose.
From 1 April 2015, as a result of the Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2015 (SI2015/501), employers are not required to automatically enrol or re-enrol eligible jobholders where the employer has reasonable grounds to believe that, on the enrolment or re-enrolment date in relation to the contract, the person holds enhanced protection, fixed protection or individual protection.
Although in each of these cases the employer can nevertheless choose to automatically enrol or re-enrol the person into the Scheme.
At the time of this publication the legislation reducing the lifetime allowance to £1 million is not in place and the available methods of protection are not yet finalised.
HSC Pension Service must advise caution, as there may be future changes and amendments made to the legislation that will frame these protections, before the final drafting of the Finance Bill 2016 goes before Parliament and becomes the Finance Act 2016.
The information contained within the lifetime allowance factsheets are therefore based on HMRC announcements received to date and how we expect the legislation to work, based on previous protections. We anticipate that more details will be known before 6 April 2016.
Members should consider very carefully any decision to opt-out and take into consideration the valuable pension and attaching risk benefits (e.g. death in service benefits) that the Scheme provides. If members think they may be affected by the lifetime allowance, it is recommended that they take independent financial advice from a registered individual who can assess and quantify the extent of any potential tax liability and also comment on the benefits of remaining with HSC Pension Service. Before asking for advice members should make sure they know which type of adviser they are dealing with. A list of independent financial advisors can be found on the following links:
IFA Promotions Limited – www.unbiased.co.uk
The Personal Finance Society – www.findanadviser.org
It is advisable for members to check that any independent financial advisor they choose is authorised with the:
Financial Conduct Authority
25 The North Colonnade
Telephone: 0800 111 6768 or visit their website: www.fca.org.uk
Individual Protection 2016
Members can apply to HMRC for individual protection 2016 as long as they do not have primary protection (active or dormant) and the capital value of their pension benefits, from all their registered pensions schemes is equal to or over £1 million as at 5 April 2016.
Individual protection 2016 allows members to accrue further benefits in their Scheme, without the risk of losing this protection.
Members will have an individual lifetime allowance equal to the capital value of their benefits at 5 April 2016 but subject to a maximum cap of £1.25 million. Pension benefits will be protected up to this amount and they may be able to take a tax-free lump sum of up to 25% of their individual lifetime allowance, this will be lower if the member already has benefits in payment.
A lifetime allowance charge would be due on benefits in excess of the individual lifetime allowance amount.
Individual protection will remain dormant while the member holds:
Fixed protection 2012
Fixed protection 2014
Fixed protection 2016
Individual Protection 2014
A reminder that members still have time to apply for individual protection 2014 as the deadline does not end until 5 April 2017. Members with a capital value of benefits of more than £1.25 million as at 5 April 2014 should consider applying instead for individual protection 2014, which would give them a higher individual lifetime allowance than individual protection 2016.
More about individual protection can be found at: http://www.hmrc.gov.uk/manuals/ptmanual/ptm094000.htm