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Which protection?

There are currently two forms of lifetime allowance (LTA) protection which remain available to clients - fixed protection 2016 and individual protection 2016. It’s no longer possible to apply for any of the earlier types of protection.

If a client’s pension benefits are likely to be more than the standard LTA (frozen at £1,073,100 until April 2026) they may need to at least consider protecting their benefits against the possibility of LTA tax charges when they take them.

The first step will be to decide which of the 2016 protections they can apply for - or possibly even both!

• Fixed protection 2016 (FP2016)
  FP2016 is available regardless of the client’s fund size or benefit value - as long as they don’t have enhanced protection, primary protection or an earlier version of fixed protection. But it’s aimed at those whose pension benefits will, or are likely to, exceed the LTA when benefits are taken.
  
  However, FP2016 is not available if, after 5 April 2016:
   
  • there’s been any ‘benefit accrual’ under a defined benefit (DB) pension scheme or contributions paid to any other type of pension
  • or a new pension arrangement has been started, other than to accept a transfer of your existing pension rights
    
    
• Individual Protection 2016 (IP2016)
  Pension benefits had to be valued at more than £1M on 5 April 2016 to be eligible to apply for IP2016. But it’s not available to those who have either primary protection or individual protection 2014. Unlike fixed protection, there was no requirement to stop pension contributions or accruing benefits under DB schemes.
   
  
• Both FP2016 and IP2016
  For those eligible to apply for both, it’s worth taking this ‘belt and braces’ approach.
  
  FP2016 would be the default protection. But if FP2016 was somehow lost, IP2016 could then be relied upon.
  
  And even if the full £1.25M was protected under IP2016 alone, there could still be value in applying for both, because IP2016 could potentially be lost (or reduced) if pension benefits are shared on divorce.   

The value in applying for protection will depend on how much protection this will give in relation to the standard LTA. The LTA had been increasing by CPI each year, but in the 2021 Budget it was announced that it would be frozen until April 2026. So some clients who may have expected that the standard LTA would exceed the amount they could protect by the time they intend to take benefits, may not have bothered applying for protection. This decision could be worth revisiting. Even if the CPI link is restored in 2026, it's always worth remembering that the protection could still be valuable should the client unexpectedly die before the standard LTA exceeds the amount that could be protected. 

Applying for fixed protection 2016

There’s no deadline for applying for FP2016 and the process is relatively straight forward. No valuations or benefit details are needed.

The process is all online and a Government Gateway account is required. It can be accessed using this link: Apply for Fixed Protection 2016.

Applying for FP2016 is simply a case of confirming that on 6 April 2016:

• you were a member of a registered pension scheme (or a relieved member of a relieved non-UK pension scheme)
• you didn’t already have enhanced protection, primary protection or an earlier version of fixed protection and
• since 6 April 2016, nothing has happened to make you ineligible for fixed protection (for example, further pension contributions paid or benefit accrual).

Applying for individual protection 2016 and valuing your pensions

There’s no deadline for applying for IP2016. But unlike applying for FP2016, benefits need to be valued as at 5 April 2016 and these details will be needed before starting the application process.

The information which may be needed includes:

• the value of any benefits in payment before 6 April 2006
• the value of any benefits taken between 6 April 2006 and 5 April 2015 (including benefits transferred overseas)
• the value of any benefits not yet taken by 5 April 2016
• the amount paid to an overseas scheme that the client got UK tax relief on
• the value of any pensions shared on divorce since 5 April 2016 (and the date of the sharing order)

The application for IP2016 can be accessed using this link: Apply for individual protection 2016. The process is all online and a Government Gateway account is required.

The online application gives some limited guidance on valuing pensions and links to further guidance for more complicated circumstances.

The following are the three main areas where pension benefit values will be required.

Pensions in payment before 6 April 2006

The application asks "Did you get an income from any of your pensions before 6 April 2006?" If so, the value on 5 April 2016 is required.

The way these pre-6 April 2006 benefits are valued for this purpose depends on the type of pension in payment at the time of the first benefit crystallisation event (BCE) - or 5 April 2016 if there had been no BCE:

• Lifetime annuities or scheme pensions
  (Clients who purchased an annuity or took DB benefits)
  
  
  • BCE before 6 April 2016 - 25 x the yearly pension on the BCE date x (£1.25M/LTA at BCE date)
  • No BCE before 6 April 2016 - 25 x the yearly pension on 5 April 2016
    
    
• Capped drawdown
  The maximum income that could be taken from capped drawdown is based on a percentage of the GAD rates. This percentage was increased from 120% to 150% and, as a result, the timing of the first BCE is important. If the BCE happened in the 2015/16 tax year when 150% of GAD was used, or if there was no BCE before 6 April 2016, an adjustment is made (120%/150% = 0.8).
  
  
  • BCE before 6 April 2015 - 25 x the maximum yearly income allowed under capped drawdown on the BCE date x (£1.25M/LTA at BCE date)
  • BCE in 2015/16 tax year - 25 x the maximum yearly income allowed under capped drawdown on the BCE date x 0.8
  • No BCE before 6 April 2016 - 25 x the maximum yearly income allowed under capped drawdown on 5 April 2016 x 0.8
    
    
• Flexi-access drawdown and flexible drawdown
  (Clients already in drawdown before 6 April 2006, who later went into flexible drawdown or flexi-access drawdown)
  
  Flexi-access drawdown allows unrestricted access to income, as did its predecessor, flexible drawdown. For the purpose of valuing the benefits for IP2016, 25 x the maximum capped drawdown income limit immediately before it became flexible drawdown or flexi-access drawdown is used. 
  
  As the maximum income limits were changed from 120% to 150% of the GAD rates, the date the fund first became flexible drawdown or flexi-access drawdown affects the calculation:
  
  
• Flexi-access drawdown (and not in flexible drawdown before 6 April 2015) – 25 x the maximum yearly income that could have been paid under capped drawdown on the date it was designated for flexi-access drawdown x 0.8.
  
  
• Flexible drawdown declaration made in a drawdown year that began before 27 March 2014 - 25 x the maximum yearly income that could have been paid under capped drawdown on the date it was designated for flexible drawdown.
  
  If there's been a BCE, the figure is then adjusted by multiplying it by (£1.25M/LTA at the BCE date).
  
  
• Flexible drawdown declaration made in a drawdown year that began after 26 March 2014 - 25 x the maximum yearly income that could have been paid under capped drawdown on the date it was designated for flexible drawdown x 0.8.
  
  If there's been a BCE, the figure is then adjusted by multiplying it by (£1.25M/LTA at the BCE date).

Pensions taken between 6 April 2006 and 5 April 2016

The application asks "Did any of these events happen between 6 April 2006 and 5 April 2016?

• you got money from your pension
• you transferred a pension scheme to a scheme held overseas
• you turned 75 with pension savings which you hadn’t yet taken" 

If the answer is ‘yes’, the value on 5 April 2016 is required. These events are BCEs.

The value is the amount that was crystallised, adjusted by the change in the LTA from the BCE date to 5 April 2016, i.e.:

        the crystallised value x £1.25M/LTA at BCE date.

Pensions not yet in payment on 5 April 2016

The page headed "What were your UK pensions worth on 5 April 2016?" is where the value of any benefits that had not yet come into payment by 5 April 2016 is added - with the exception being for anyone who reached age 75 before that date (as these benefits should already have been accounted for).

The value of these benefits depends on the type of pension scheme:

• Defined contribution schemes - the fund value on 5 April 2016
• DB schemes - 20 x the yearly pension accrued to 5 April 2016 (plus any separate lump sum)

Making changes to your protection

If changes need to be made to a client’s IP2016 after applying, this can be done via the Government Gateway account. This may be required if:

• a mistake was made with the values when applying or
• a pension becomes subject to a pension sharing order

Application after death

If someone dies without having applied for LTA protection, their personal representatives can still make an application if the deceased met the qualifying criteria.

What happens next?

Following an FP2016 or IP2016 application, two reference numbers will be provided:

• a protection notification number
• a scheme administrator reference

These reference numbers should be given to the scheme administrator when taking pension benefits so that they know the member has LTA protection. They’re then able to check the level of protection before testing the benefits against the LTA. 

Lost reference numbers can be retrieved via the Government Gateway account.

If your client has successfully applied for IP2016 but also holds enhanced protection or a version of fixed protection, IP2016 will remain dormant for as long as the other protection is valid.  Reference numbers in relation to IP2016 will not be provided - they will only be issued if HMRC is told that the other protection is no longer valid.