HMRC and HM Treasury have issued a consultation on individual protection from the lifetime allowance charge. Consultation closes on 2 September 2013. The consultation document includes draft legislation for the Finance Bill 2014.
Individual protection and fixed protection are the two forms of protection for pension savings of up to £1.5m made before 6 April 2014, the date on which the lifetime allowance (LTA) is reduced from £1.5m to £1.25m. Fixed Protection 2014 (FP14) is already available; this allows an individual to fix his LTA at £1.5m as long as he does not make any further UK tax-relieved pension saving after 5 April 2014.
Individual protection 2014 (IP14) will give an individual a personalised LTA based on the value of his pension savings at 6 April 2014 (between £1.25m and £1.5m). It will allow him to continue to accrue benefits. It is similar in many ways to primary protection, which was introduced with effect from A-day.
Individuals will be able to apply for IP14, if:
- they have pension savings of greater than £1.25m at 5 April 2014; and
- they do not have either primary or enhanced protection.
Individual protection will be expressed as a monetary amount. This amount will not change unless the standard LTA rises above the individual's personal LTA. So, for example, someone with pension savings of £1.35m at 5 April 2014 will have a personalised LTA of £1.35m and be treated as having a standard LTA of £1.35m unless and until the standard LTA rises above £1.35m, at which point his LTA will rise with the standard LTA.
An individual can have IP14 and FP14 or FP12 (LTA of £1.8m). The FP will take precedence (as it will be at least as much as IP14) until it is lost, i.e. until some form of benefit accrual takes place, at which point IP14 will be triggered.
An individual wishing to apply for IP14 will have to do so between 6 April 2014 and 5 April 2017. All his pension savings will have to be valued as at 5 April 2014, including benefits in payment and future benefits. The valuation methods and assumptions will be similar to those already used for other protections. For example, for uncrystallised DB benefits the valuation will be 20 times the rate of accrued pension – so £20,000 of pension would use up £400,000 of the LTA.
Where an individual is subject to a pension debit on or after 6 April 2014, the position will be similar to that which applies to existing primary protection: his personalised LTA will be reduced by the amount of the pension debit (and he may lose IP14 altogether if the reduction brings the personalised LTA below £1.25m). Consideration is being given as to whether a reduction to the personalised LTA should also be made where benefits have been reduced as a result of the "scheme pays" regime.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.