Individual protection for your pension
The reduction in the pension lifetime allowance from £1.5 million to £1.25 million from 6 April 2014 was accompanied by some complicated transitional arrangements.
Before 5 April 2014, you had the option of protecting your pension savings by applying for fixed protection 2014. This allowed you to fix your lifetime allowance at £1.5 million, but you would lose the benefit of this protection if you were to make any future contributions to a money purchase pension scheme, or if you were to build up new benefits in a defined benefits scheme above a restricted set amount, or if you joined a new pension scheme. However, you can now apply for a new facility called individual protection 2014.
You can only use individual protection 2014 if your pension savings on 5 April 2014 were valued at over £1.25 million. Your allowance will then be fixed at the value of your pension savings on 5 April 2014 - subject to a maximum of £1.5 million. The good news is that you can continue to make future contributions and accrue further pension benefits without losing protection.
The value of any further pension savings above that level will then be subject to the lifetime allowance charge that applies when pension savings exceed the lifetime allowance. The charge is at the rate of 55% if pension benefits are taken as a lump sum, and 25% if taken as pension income and the income will also be taxed. There is no downside to applying for individual protection 2014 if you qualify, because it can be held alongside fixed protection 2014.
You can have individual protection 2014 alongside enhanced protection (this was available when the lifetime allowance was first introduced) and fixed protection 2012 (available when the allowance was previously reduced). But you cannot have it if you have primary protection, which was also available when the lifetime allowance was first brought in. You can lose enhanced protection and fixed protection 2012 in the same way as fixed protection 2014 for example, if you are not careful in opting out of automatic enrolment into a workplace pension scheme.
Individual protection 2014 is a very useful back-up. And you have until 5 April 2017 to make an application. This is an extremely complicated area, so please contact us for advice.
In this edition
Pensions: how flexible is flexibility?
This newsletter is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The newsletter represents our understanding of law and HM Revenue & Customs practice as at 10 October 2014