Techzone

What is individual protection?

Individual protection provides protection against the reductions in the lifetime allowance (LTA) which occurred in 2014 and 2016. There are two versions of protection:

• Individual protection 2014 (IP2014) which provided protection against the fall in the LTA from £1.5M to £1.25M
• Individual protection 2016 (IP2016) which provides protection when the LTA reduced from £1.25M to £1M.

Individual protection provides an increased personal LTA based on the value of their total pension benefits at the point when the standard LTA was reduced. There's 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.

From 6 April 2023, there will be no LTA tax charge on the excess over the LTA. However, the protection remains valid for tax free cash purposes.

The intention is that the LTA will be abolished completely from 6 April 2024, but the restriction on tax free cash will remain. 

The two versions of individual protection have the following limits.

IP2016

• Gives a personal LTA between £1M and £1.25M
• Protection valid from: 6 April 2016
• Applicant needs at least £1M of total pension benefits as at 5 April 2016 

IP2014

• Gives 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 as at 5 April 2014

Clients who have already secured a higher personal LTA may be unable to apply for individual protection.

• IP2014 is not available for those who already have primary protection as they will have already secured a protected LTA in excess of £1.5M.
• Similarly, IP2016 is not available for those who already have primary protection or IP2014.

Applying for individual protection

There’s no deadline for applying for IP2016. The application process is online and requires a Government Gateway account - the form can be found here. 

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

If someone who was eligible for individual protection dies without applying, their personal representative may make the application on their behalf if death benefits are to be tested against the LTA.

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

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

Pre A-Day benefits 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 at 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 Pre 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) as at 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

Before taking benefits, the pension provider or trustees should be notified that individual protection applies. Otherwise, benefits would be tested against the standard LTA.

Successful applicants will receive two reference numbers which they will need to keep:

• a protection notification number
• a scheme administrator reference

Both of these numbers will need to be given to the scheme administrator on crystallisation to ensure the correct LTA is used in their calculations.

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 25% of the available protected LTA. But in some circumstances the tax free cash could be more or less than 25%. For example, more than 25% tax free cash could be available to those with scheme specific tax free cash protection, or less than 25% tax free cash might be available if the scheme has to provide a Guaranteed Minimum Pension (GMP).

When the LTA is abolished on 6 April 2024, there will still be the limit on tax free cash, however, how this will be monitored in practice is not yet known.

Before 6 April 2023, if benefits above the available LTA were taken, the excess was subject to an LTA tax charge. For benefits taken from that date, LTA tax charges will no longer apply. 

Benefits taken after 5 April 2016 but before registering for IP2016

If there have been any benefit crystallisation events (BCEs) on or after 6 April 2016, 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, leaving more LTA available for later BCEs (unless fully used up).

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

Reducing or losing individual protection

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 LTA 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.