Jones-Tinsley: Closing date looms for Individual Protection 2014

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). 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).Advisers will have understandably thought, “well, that’s that”, as far as protecting accrued pension benefits was concerned.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 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 previously higher allowance levels.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.To be eligible for IP14, the total value of your client’s pension savings, calculated as at 5 April 2014, must be worth more than £1.25 million.The exact amount of their protected LTA is therefore based on the total value of their pension savings on 5 April 2014, but if this value exceeds £1.5 million, then their protected LTA is capped at £1.5 million.However, it is not possible for them to apply for IP14 if they already have Primary Protection.But - the crucial difference with IP14 over Enhanced and Fixed Protection is that your client can continue to contribute to their pension arrangement(s) whilst they hold it.However, as outlined below, they must pay tax on any monies taken from their pension(s) that exceed their protected LTA.Unlike EP, therefore, IP14 does not offer your client total protection from an excess tax charge.IP14 can only now be applied for online and, unlike previous paper-based applications for protection, you will not be able to apply for IP14 on behalf of your client. This is because your client must firstly open a personal account for HMRC online services, before they can start the IP14 application process.Your client will also need to know what their pension(s) were worth on 5 April 2014 and a breakdown of the overall amount.Once the application has been successfully submitted by your client, the online system will confirm that they have IP14, giving details of the amount protected, and a unique reference number. This information forms their IP14 ‘certificate’ and will be available for viewing via the online personal tax account that they opened at the start of the process.Whenever a ‘Benefit Crystallisation Event’ (BCE) occurs, your client should give their IP14 unique reference number to their pension scheme administrator(s). This will mean that their benefits are tested against their protected LTA, rather than the lower ‘standard’ LTA, (which is £1 million for the 2016/17 and 2017/18 tax years).In summary, 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, however, IP14 may be more appropriate for some of your clients 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 your client’s pension portfolio, time is certainly of the essence.James Jones-Tinsley is the Self-Invested Pensions Technical Specialist for Barnett Waddingham LLP

Jones-Tinsley: Closing date looms for Individual Protection 2014

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