From 6 April 2016, the lifetime allowance was reduced from £1.25 million to £1 million, and is currently £1.055 million with effect from 6 April 2019. Any pension benefits above the lifetime allowance are subject to a lifetime allowance charge, currently 55% if the excess is paid as a lump sum or 25% if the excess is paid as income. However, the Government recognised that some individuals would have been affected by the reduction in the lifetime allowance, such as those who planned their pension benefits in the expectation of a higher lifetime allowance. Therefore, individuals not registered for primary and/or enhanced protection are able to apply for Fixed Protection 2016 and/or Individual Protection 2016. 

Fixed Protection 2016 can be applied for by individuals who do not have primary and/or enhanced protection. It will generally only be of interest to those individuals whose pension benefits have a value in excess of £1 million (or who anticipate that the value of their pension benefits will exceed the reduced standard lifetime allowance by the time they are crystallised). It protects pension savings of up to £1.25 million from a lifetime allowance charge. If the standard lifetime allowance increases in the future to more than £1.25 million, Fixed Protection will cease and the individual’s benefits will become subject to the higher standard lifetime allowance. 

Fixed Protection conditions and benefit accrual 

The following conditions must be met if Fixed Protection is to apply. If they are not met, Fixed Protection will be lost and the individual must report this to HMRC. To summarise:

• The individual cannot set up any new registered scheme on or after 6 April 2016 unless that scheme is solely to receive a transfer of existing benefits (i.e. a ‘permitted transfer’). 

• No new contributions may be paid to a money purchase arrangement on or after 6 April 2016. The only exception to this is contributions to a life assurance policy that started before 6 April 2006. 

• The amount of benefits that can be accumulated under a defined benefit/cash balance scheme on or after 6 April 2016 will be limited to not exceeding the ‘relevant percentage’. For a deferred member of a defined benefit scheme the ‘relevant percentage’ is an increase in the member’s pension each year of no more than either: – The annual rate used to revalue the member’s benefits as specified in the scheme rules as at 9 December 2015, or if none. – The increase in the Consumer Price Index (CPI) in the year ending in September of the previous year.

 For an active member of a defined benefit scheme the ‘relevant percentage’ is an increase in the member’s pension that is no more than the increase in the CPI over the year ending in September of the previous year. In practice, this means that few, if any, active defined benefit members will be able to continue to accrue further benefits under their scheme without breaching the ‘relevant percentage’.

 The ongoing accrual of death in service benefits under a defined benefit scheme will not result in the loss of Fixed Protection. 

Auto enrolment and Fixed Protection

If an employer auto-enrols an employee into a new pension scheme, the employee will have one month to opt out of the scheme. Regulations then allow that employee to be treated as though they had never been a member of that pension scheme and Fixed Protection will be retained. If the member is automatically enrolled in a scheme in accordance with provisions other than as set out in the Pensions Act 2008, Fixed Protection will normally be lost. 

Individual Protection 2016 will give an individual a personalised lifetime allowance of the value of their pension rights as at 5 April 2016, subject to a limit of £1.25 million. This personalised lifetime allowance will be fixed and will not increase unless the standard lifetime allowance becomes greater than the individual’s personalised lifetime allowance at some time in the future. Any amount above the personalised lifetime allowance will be subject to the lifetime allowance charge. 

Applying for Fixed and/or Individual Protection 2016 

There is no application deadline for Fixed Protection 2016 or Individual Protection 2016. However, individuals will need to apply online for protection before they take their benefits as they will need the HMRC reference number if they want to rely on the protection. Individuals will no longer receive a lifetime allowance protection certificate, instead once they have successfully applied for protection the online service will provide them with a reference number which they will need to keep.

Valuation of benefits for Individual Protection 2016 are valued as at 5 April 2016. 

In summary: 

• For uncrystallised benefits under money purchase schemes, it is the value of the fund. 

• For uncrystallised benefits under defined benefit schemes, it is the value of accrued pension multiplied by a factor of 20 plus any pension commencement lump sum (PCLS) 

  • The lifetime allowance is £1,055,000 (2019/20) and increases annually in line with the Consumer Price Index (CPI).
  • Two forms of protection have been available since 6 April 2016. Both can still be applied for providing the eligibility criteria can be met.
  • Fixed Protection 2016 (or FP16) – protects benefits up to £1.25m.
  • Individual Protection 2016 (or IP16) protects benefits up to an individual’s protected lifetime allowance (dependent on the value as at 5 April 2016) between £1m and £1.25m.

Valuation of benefits for Individual Protection 2016 are valued as at 5 April 2016. 

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