'A-Day' on 6 April 2006 ushered in a new taxation regime for pensions, under the heading of 'Pension Simplification', (no sniggering at the back, please).
"IP14 was principally intended for those individuals who have accrued significant pension savings over their working lifetime, and are neither in a position to – nor want to - amend their employee benefits package."
Clearly, it is vital that those who had accrued pension benefits under the various tax regimes that existed before A-Day, were not penalised when drawing their benefits under the new regime, on or after A-Day.
Therefore, two types of ‘transitional protection’ were introduced on A-Day; namely, ‘Primary Protection’ (PP) and ‘Enhanced Protection’ (EP).
Provided that the individual could meet the requirements to apply for each form of protection, it was possible to apply for either, or both. The closing date for applications was 5 April 2009 (i.e. three years after A-Day).
Pension practitioners understandably thought “well, that’s that”, as far as protecting accrued pension benefits was concerned.
Tweaks to pension tax rules
Unfortunately, not so. The global financial crisis of 2008 and beyond, and the resulting austerity measures of successive UK governments, precipitated a number of changes to the pensions tax system; largely, a reduction in both the Annual Allowance (AA) and the Lifetime Allowance (LTA) to ever lower levels.
And with each government ‘tweak’ to the rules, new forms of protection were rolled-out, in order to protect pension savings that had been legally accrued under higher allowance levels.
Introducing Fixed and Individual Protection 2014
The reduction in the LTA from £1.5 million to £1.25 million on 6 April 2014 was accompanied by ‘Fixed Protection 2014’ and ‘Individual Protection 2014’.
Whereas the closing date for Fixed Protection 2014 was 5 April 2014, the period of time to apply for Individual Protection 2014 (IP14) mirrored that for PP and EP; namely, three years from 6 April 2014.
This means that the closing date to apply for IP14 of 5 April 2017 is fast approaching, and the remainder of this article provides an overview of who can apply for IP14, what it protects, how to apply for it, how to calculate if you have sufficient benefits in order to apply for it, and if IP14 can ever be lost.
To be eligible for IP14, the total value of your pension savings, calculated as at 5 April 2014, must be worth more than £1.25 million.
The exact amount of your protected LTA is therefore based on the total value of your pension savings on 5 April 2014, but if this value exceeds £1.5 million, then your protected LTA is capped at £1.5 million.
You can still apply for IP14 if you already have any of the following:
- Enhanced Protection; or
- Fixed Protection (2012); or
- Fixed Protection 2014; or
- Fixed Protection 2016.
If you have Fixed Protection 2016, it will become dormant, once you obtain IP14, (which takes effect from 6 April 2014).
For all other protections, IP14 will stay dormant until you lose, or give up, your other protection, and you must tell HMRC in writing if this happens.
It is not possible to apply for IP14 if you already have Primary Protection, (as they share many similarities).
However, as outlined below, you must pay tax on any monies taken from your pension(s) that exceed your protected LTA.
Applying for IP14 helps to protect pension savings accrued before 6 April 2014, from a LTA excess tax charge, subject to an overall maximum of £1.5 million.
Any benefits taken in excess of your protected LTA will attract an excess tax charge of either 55% or 25% of the excess, depending on whether the excess is taken as a lump sum or as pension income, respectively.
Unlike EP, therefore, IP14 does not offer the individual total protection from an excess tax charge.
Before you start the application process, you will need:
- an account for HMRC online services - you can set one up when you start your application; and
- to know what your pension(s) were worth on 5 April 2014 and a breakdown of the amount (see below).
If you don’t know this information, you can ask your pension scheme administrator to calculate it for you, and if you have more than one pension arrangement, you should add the relevant amounts from each arrangement together, to ascertain if the total exceeds £1.25 million, as at 5 April 2014.
In addition, as well as providing HMRC with some basic information, (that is, your name, date of birth and National Insurance number), you will also need to confirm that you did not hold Primary Protection as at 5 April 2014.
Once the application has been successfully submitted, the online system will confirm that you have IP14, giving details of the amount protected, and a unique reference number. This information forms your IP14 ‘certificate’ and will be available for viewing via the online personal tax account that you opened at the start of the process.
Benefits are tested against the LTA whenever a ‘Benefit Crystallisation Event’ (BCE) occurs.
BCEs occur whenever your pension benefits are taken, (which includes certain lump sum benefits paid on your death), or when you reach age 75.
Whenever a BCE happens, you should give your IP14 unique reference number to your pension scheme administrator(s). This will mean that your benefits are tested against your protected LTA, rather than the lower ‘standard’ LTA, (which is £1 million for the 2016/17 and 2017/18 tax years).
How to calculate what the total value of your pension savings are, as at 5 April 2014
You will need to provide HMRC with ‘amounts A to D’ (where applicable), and their ‘total relevant amount’.
The ‘total relevant amount’ is the sum of the amounts A to D, (that is, A+B+C+D), as set out below;
- AMOUNT A = the amount of any pensions already in payment before 6 April 2006, valued at 5 April 2014;
- AMOUNT B = the amount of any benefits ‘crystallised’, (that is, taken), between 6 April 2006 and 5 April 2014 inclusive, valued at 5 April 2014;
- AMOUNT C = the amount of any ‘uncrystallised’ (that is, undrawn) pension savings in UK registered pension schemes, valued at 5 April 2014; and
- AMOUNT D = the amount of any uncrystallised pension savings in ‘relieved non-UK pension schemes’, valued at 5 April 2014.
You should ensure that these details are included and correct, because HMRC will reject applications with incomplete information, or if amounts A to D do not add up to the total relevant amount provided.
Potentially. You can only lose IP14 if either;
- a pension debit, (that is, on divorce/pension sharing), reduces your protected LTA to below the level of the standard LTA; or
- the standard LTA increases to a level greater than your protected LTA.
If you lose IP14, you will revert to the standard LTA and any further BCEs you have will be tested against this lower amount.
If the value of your BCEs exceeds the standard LTA, you will be liable for a tax charge on the excess (as summarised earlier).
However, HMRC will not revisit any BCEs that occurred before you lost IP14, or re-test them against the standard LTA.
You have 60 days in which to tell HMRC about a pension debit; otherwise a penalty of up to £300 will be levied, with the possibility of additional penalties, if the information is still not submitted to them.
IP14 was principally intended for those individuals who have accrued significant pension savings over their working lifetime, and are neither in a position to – nor want to - amend their employee benefits package, which is likely to include ongoing employer (and possibly employee) pension contributions.
Given the further reduction in the standard LTA with effect from 6 April 2016, IP14 may be even more appropriate to particular individuals now, as opposed to during 2014 and 2015; for example, those whose pension savings were only slightly above £1.25 million, as at 5 April 2014.
However, with a closing date of 5 April 2017, and depending upon the complexity of an individual’s pension portfolio and the need to correctly calculate its value as at 5 April 2014, time is of the essence.