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How to protect your pension LTA as the end of the tax year approaches
More and more people are in danger of exceeding their pension lifetime allowance (LTA), resulting in excess charges. With the tax-free figure gradually being reduced over time, protecting your lifetime allowance should be an integral part of pension planning and a high priority as the end of the tax year approaches.
The standard LTA is the maximum limit of pension benefits which can be taken by an individual – either as lump sums or retirement income – without being subject to tax charges. This value is set annually by the government and has dropped almost £750,000 in the past eight years, meaning the amount of pension savings that can be taken tax-free has dramatically decreased.
However, LTA can be protected – i.e. the rate fixed – in order to benefit from a higher maximum allowance than the current standard LTA. One particularly pressing consideration when it comes to protecting your lifetime allowance is applying for Individual Protection 2016. IP16 ensures an individual’s lifetime allowance is protected up to the value of their pension savings on 5 April 2016, subject to a maximum of £1.25 million (the standard LTA on this date). It is available to clients who have not previously arranged IP14, which similarly protected the value of pensions on 5 April 2014 up to £1.5 million (the standard LTA on this date). The closing date for IP14 was 5 April 2017, but individuals can still apply for IP16, securing their lifetime allowance at up to £1.25 million.
If you believe your pension to be potentially of a higher value than the existing standard LTA, you may wish to protect your allowance at the higher maximum offered in 2016. The LTA dropped to £1million on 6 April 2016, so if your pension savings were higher than this at the time, you may benefit from taking out IP16, which will fix your individual lifetime allowance at the value of your pension savings on 5 April 2016 up to £1.25 million (almost quarter of a million more than the current standard lifetime allowance).
Individuals with pensions worth less than £1 million on 5 April 2016 are not qualified to apply. Any pension savings above your individual lifetime allowance will be liable for tax in the same way as the standard lifetime allowance. If the standard LTA increases above the protected amount, the IP16 would no longer apply and the individual’s lifetime allowance would revert to the standard LTA.
While there is currently no deadline to apply for IP16, in order to apply you will need to provide the following information:
- Income you have taken from pensions before 6 April 2006.
- Lifetime allowance you used between 6 April 2006 and 5 April 2016.
- The value of pensions you have not yet taken.
- Money you put into an overseas pension between 6 April 2006 and 5 April 2016 that gained UK tax relief.Calculating the value of your pension will likely require figures from your pension administrator, but the statutory obligation to provide you with this information only applies for four years, which means pension administrators are only legally required to hand over this information until 5 April 2020. After this time you may struggle to gain access to the information required to apply for IP16.
Pension scheme administrators must provide help in calculating the relevant amount if the individual was a member of the scheme on 5 April 2016, the scheme administrator receives the request in writing before 6 April 2020, and the information requested is necessary to calculate the relevant value in order to apply for IP16. In which case, the information must be supplied to the individual within three months.
Even if the individual has transferred their pension from a defined benefit scheme to a defined contribution scheme, the administrator is still held accountable for supplying the information for four years.
Unlike fixed or enhanced protection, it is possible for an individual with IP16 to continue to make further pension contributions and accrue additional benefits after 5 April 2016, but any benefits in excess of their personal lifetime allowance will be subject to tax.
It is not possible to hold IP16 if primary protection or IP14 is already held. However, it is possible hold IP16 alongside enhanced protection or fixed protection 2012, 2014 or 2016, in which case these protections would take precedence.
An individual may lose their IP16 if they become subject to a pension debt as a result of a pension sharing order following divorce. If the reduction results in the pension savings dropping below £1million then that becomes the value on which IP16 is calculated and therefore IP16 will be lost and the individual will revert back to the standard LTA. In the event that individual protection has already been utilised to receive benefits in excess of the standard LTA before the allowance was reduced, the benefits taken will remain protected.
An alternative option to IP16 is fixed protection 2016, which similarly fixes your LTA limit at £1.25 million. There is no minimum pension value required to apply for FP16, though individuals are not able to make further contributions or benefit accrual after taking out the protection. You must have stopped making contributions and accruing benefits by 5 April 2016, and you may not apply if you already hold primary, enhanced or previous fixed protection – FP12 or FP14.
It is important to seek advice from a qualified financial adviser when it comes to any form of LTA protection. A clear understanding of the options available and the rules within each option are vital, as losing protection can have serious consequences to your finances.
If you believe you may be eligible for IP16 or are interested in taking out FP16, get in touch today to speak to a financial adviser. In the case of protecting your pension lifetime allowance through IP16 being beneficial to you, it is important to make it a priority leading up to the tax year-end. Leaving it until after 5 April 2020 to request the relevant information from your provider could result in you being unable to access the required figures to apply for IP16.
This article is for general information only and is not intended to be individual advice. Tax planning services are not regulated by the Financial Conduct Authority. This article represents our understanding of the law and HM Revenue & Customs practise as at 11/03/2020.