In April 2016, the lifetime allowance applicable to pension savings was further reduced from £1.25 million to £1 million. At the same time, two new transitional protection regimes were introduced: Fixed Protection 2016 and Individual Protection 2016.
Fixed Protection 2016
Fixed Protection 2016 is aimed at anyone who expects the value of their pension savings to be above £1 million at the point they access the benefits. It allows you to preserve your lifetime allowance at the previous limit of £1.25 million.
There is no deadline date to make an application for Fixed Protection 2016 – however, it is conditional upon no further contributions or benefits accruing after 5 April 2016 – in simple terms, if you’ve made a contribution into a personal pension or remained an active member of the NHS Pension Scheme post 5 April 2016, you are no longer eligible to apply.
Individual Protection 2016
Individual Protection 2016 provides a personal lifetime allowance between £1m and £1.25m (capped at £1.25m), based on the collective value of your pension savings as at 5 April 2016. However, to be eligible to apply, the value of your pension savings must be at least £1 million as at 5 April 2016.
Importantly, in a difference from Fixed Protection 2016, with Individual Protection 2016, if you choose to do so, you can continue making contributions into a personal pension and/or accruing further benefits in the NHS Pension Scheme.
Again, there is no deadline to apply for Individual Protection 2016. Before applying, you will need to request from your pension provider(s) a valuation of your benefits as at 5 April 2016.
Individual Protection 2014
This was introduced in April 2014, to coincide with the pensions lifetime allowance reducing from £1.5 million to £1.25 million.
It works in an identical way to Individual Protection 2016 and provides a personal lifetime allowance between £1.25m and £1.5m (capped at £1.5m), based on the overall value of your pension savings as at 5 April 2014. However, to be eligible to apply, the value of your pension savings must be at least £1.25 million as at 5 April 2014.
However, there is a deadline date for Individual Protection 2014 and it’s now not too far away – 5 April 2017.
How do I value my pension savings?
For a money purchase pension, such as a personal pension or SIPP, it’s straightforward – you simply take the value of the fund on the relevant date.
For a defined benefit scheme, such as the NHS Pension Scheme, a formula is used to put a capital value on your accrued benefits – the value of the annual pension is multiplied by a factor of 20 to which the value of any lump sum benefit is then added.
For example, as at 5 April 2016, Dr Smith, a member of the 1995 section of the NHS Pension Scheme, has accrued an entitlement to a pension of £50,000 per year and a lump sum of £150,000. He holds no other forms of pensions lifetime allowance protection and has continued to be an active member of the NHS Pension Scheme post 5 April 2016. Therefore, he will be eligible to apply for Individual Protection 2016 and this will provide him with a personal lifetime allowance of (£50,000 x 20) + £150,000 = £1.15 million.
Why is this important?
If, when you retire, the value of your pension benefits is above the applicable lifetime allowance, you will suffer a tax charge on the excess of 25% if it is drawn as an income or 55% if it is drawn as a lump sum. Therefore, without appropriate protection in place, it’s quite feasible for the tax charge to be in excess of £100,000.
Please note that in relation to NHS Pension Scheme benefits, the tax isn’t taken as a lump sum. Instead, the tax is spread through a lifetime deduction in your pension benefits using a factor of 20. For example, for a member with a tax charge of £100,000, their NHS Pension will be £5,000 per year less than it would have otherwise been.
