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Background to individual protection

From 6 April 2006 to 5 April 2023, the lifetime allowance (LTA) was a limit on the amount of pension benefits that could be taken without triggering an extra tax charge.

Individual protection was made available to provide protection against the reductions in the lifetime allowance (LTA) which occurred in 2014 and 2016. Individual protection provided an increased personal LTA based on the value of their total pension benefits at the point when the standard LTA was reduced.

The standard LTA began to rise again from 6 April 2017. Where the standard LTA became higher than the individual’s protected LTA under IP2016, the protection ceased to exist.

There are two versions of individual protection:

IP2014

• Gave a personal LTA between £1.25M and £1.5M
• Protection valid from: 6 April 2014
• Applicant needed at least £1.25M of total pension benefits on 5 April 2014
• Not available to those who already had primary protection as they would have already secured a protected LTA in excess of £1.5M.

IP2016

• Gave a personal LTA between £1M and £1.25M
• Protection valid from: 6 April 2016
• Applicant needed at least £1M of total pension benefits on 5 April 2016
• Not available to those who already have primary protection or IP2014.

There was no requirement to cease funding but, prior to 6 April 2023, benefits in excess of the personal LTA were subject to the LTA tax charge.

The Spring Budget 2023 announced that the LTA would be abolished from 6 April 2024 and that LTA tax charges would not apply for tax year 2023/24.

However, the abolishment of the LTA does not mean that individual protection is no longer valid. New allowances have replaced the LTA and individual protection is still relevant for the purposes of calculating the individual’s ‘lump sum allowance’ (LSA) and ‘lump sum and death benefit allowance’ (LSDBA). These allowances cap the amount of tax-free lump sums that can be paid during the member’s lifetime and on death.

Applying for individual protection

The application process is online and requires a Government Gateway account - the form can be found here. 

The deadline for applications for IP2016 is 5 April 2025.

If someone who was eligible for individual protection dies without applying, their personal representative may make the application on their behalf.

If successful, IP2016 will apply retrospectively from 6 April 2016, regardless of when it's granted.

A protection reference number is given in the response to an IP2016 application. This should be given to the individual’s pension scheme if relying on IP2016 when taking benefits.

The deadline for applying for IP2014 was 5 April 2017, so no new applications can be made.

Those who registered for IP2014 should have received a certificate from HMRC confirming the protection. It includes a reference number, which should be given to the individual's pension scheme if relying on the protection when taking benefits.

Valuing benefits

Applying for individual protection requires benefits to be valued at the day before the LTA reduced. The method used to value benefits varies depending on the type of scheme involved, and whether it's uncrystallised, or crystallised (pre or post A-Day).

Although the ability to make an application remains open, scheme administrators were only obliged to provide pension valuations for IP2016 purposes if the request was made before 6 April 2020. They had to provide this information within three months.

The following is a basic explanation of how benefits are valued, but more detail is available in our practical guide - 'Registering for fixed or individual protection'.

Uncrystallised benefits

This is simply the fund value at the day before the LTA reduced, or for DB Schemes - 20 times the annual pension

DC schemes - fund value on 5 April 2016 (for IP2016) or 5 April 2014 (for IP2014)

DB schemes - 20 x the yearly pension (plus any separate tax-free cash) on 5 April 2016 (for IP2016) or 5 April 2014 (for IP2014)

Benefits crystallised after 5 April 2006

The amount of the original crystallisation event is adjusted in line with the change in the LTA.

IP2016 - the amount (not percentage) crystallised at the original BCE x (£1.25M/LTA at original BCE)               

IP2014 - the amount (not percentage) crystallised at the original BCE x (£1.5M/LTA at original BCE) 

Benefits already in payment before 6 April 2006

Benefits taken before A-Day are valued at 25 x the pension in payment. However, this is adjusted in line with the change in the LTA if there have been further crystallisations post A-Day.

If there has been no post A-Day BCE: 25 x the pension in payment on 5 April 2016 (for IP2016) or 5 April 2014 (for IP2014).

If there has been a post A-Day BCE: 25 x the pension in payment on the BCE date x (£1.25M/LTA at BCE date) (for IP2016) or 25 x the pension in payment on the BCE date x (£1.5M/LTA at BCE date) for IP2014

For those in drawdown before 6 April 2006, the valuation of those benefits can be more complex.

IP2014: the value is 25 x the maximum capped income drawdown amount (based on the last review) on 5 April 2014.

IP2016: essentially this is 25 x the drawdown amount but further adjustments are made to the valuation depending on the type of drawdown (capped, flexible or flexi-access) and on when the first BCE after A-Day occurred - this is covered in more detail in our practical guide 'Registering for fixed or individual protection'.  

Taking benefits

From 6 April 2024

Before any lump sum payments are made, the pension provider or trustees should be given a note of the protection reference number so that they know that individual protection applies, and therefore that the member has a higher LSA and LSDBA. Without this, benefits will be tested against the standard LSA (£268,275) and LSDBA (£1,073,100).

The level of LSA depends on which protection the individual holds:

Tax-free cash of up to 25% of the value of the crystallised benefits can normally be taken, so long as it doesn’t exceed their available LSA.

In some circumstances the tax-free cash could be more or less than 25%. For example, if the person has scheme-specific tax-free cash protection above 25%, or where tax-free cash is limited because there’s a large GMP liability.

See our guide ‘Tax-free cash and the LSA’ for more detail, including how benefits taken before 6 April 2024 affect the available LSA.

Before 6 April 2024

Before taking benefits or reaching age 75 under the old rules, the pension provider or trustees should be notified that individual protection applies. Otherwise, benefits would have been tested against the standard LTA.

Tax-free cash of up to 25% of the value of the crystallised benefits could normally have been taken, so long as it didn’t exceed 25% of the available protected LTA. But in some circumstances the tax-free cash could have been more or less than 25%.

If benefits above the available LTA were taken before 6 April 2023, the excess was subject to an LTA tax charge. 

Benefits taken after 5 April 2016 but before registering for IP2016

If there were any benefit crystallisation events (BCEs) from 6 April 2016 to 5 April 2024, but before the individual registered for IP2016, the amount of LTA used up should be recalculated. This is because IP2016 is backdated to 6 April 2016, regardless of when it’s granted.

The benefit to the individual is that testing against a higher LTA will mean that a lower percentage of the LTA will have been used up by any such BCE. Although the LTA no longer applies, this is still relevant as it can affect the remaining levels of LSA and LSDBA available.

In such circumstances, the individual should ask their pension provider or trustees to redo the calculations, quoting their protection reference number.

Death benefits

On death before age 75, certain death benefits have to be tested against the relevant allowance in force at the time. Before 6 April 2024 this was the LTA and, from that date, it’s the LSDBA.

Under the old rules, certain pension and lump death benefits were tested against the LTA. If within the LTA, they could be paid tax free - the main exception to this were DB scheme pensions paid to dependants which were not tested but were instead subject to income tax. If the LTA was exceeded, an LTA charge was due. However, in tax year 2023/24 LTA tax charges did not apply.

From 6 April 2024, the LTA no longer exists, but there is a replacement allowance to cap the amount of lump sum death benefits which can be paid tax-free on death before age 75 - the LSDBA. Lump sum death benefits in excess of the available LSDBA are subject to income tax at the beneficiary’s marginal rate.

The LSDBA is a combined allowance for both lifetime tax-free lump sums and tax-free lump sum death benefits. So, the amount available for lump sum death benefits will be reduced by any tax-free cash amounts the member has taken, including any serious ill-health lump sums.

The level of LSDBA depends on which protection the individual holds:

Any death benefits paid from pensions crystallised before 6 April 2024 are not tested against the LSDBA. 

As the name suggests, it only applies to lump sum payments, so any death benefits paid as a pension are not tested. This emphasises the importance of being in the right scheme and getting nominations in place so that beneficiaries have all the death benefit options available and, on death of the member before age 75, can receive the death benefits tax free. Beneficiary's drawdown avoids LSDBA testing and gives maximum flexibility in how much and when benefits are drawn.

See our guide ‘Lump sum and death benefit allowance’ for more details, including how benefits taken before 6 April 2024 affect the available LSDBA.

Reducing or losing individual protection

After reductions, the standard LTA began to rise again from 6 April 2017. Where the standard LTA became higher than the individual’s protected LTA under IP2016, the protection ceased to exist.

Otherwise, individual protection can only be reduced or lost if the individual’s pension rights become subject to a pension debit as part of a pension sharing order on divorce.

Those in this situation will have their personal allowance(s) recalculated and individual protection could be reduced or even lost altogether:

Original valuation for individual protection less value of the pension debit* = new value for individual protection

* The value of the pension debit is reduced by 5% for each complete tax year since 2013/14 (for IP2014) or 2015/16 (for IP2016).

If the reduction results in a figure below £1.25M (for IP2014) or £1M (for IP2016), individual protection will be lost altogether.

Informing HMRC

It’s the member’s responsibility to inform HMRC of the reduction within 60 days of the pension sharing order applying. The member may be liable to penalties if they fail to do so.

HMRC will either adjust the level of protection or revoke it altogether, depending on the results of the reduction above.