Fixed and Individual Protection 2016

Fixed and Individual Protection 2016.

HMRC has confirmed the arrangements for registering for protection when the lifetime allowance (the maximum you can accrue in pension funds throughout your life) reduces in April 2016.

In previous articles and videos we have explained that the lifetime allowance reduces from £1.25 million to £1 million in April 2016 and if you have already built up pension funds at that level you need to consider protection.  If you do not protect your lifetime allowance where you have exceeded £1 million you may face tax penalties.

Fixed protection

You can fix your protection with a lifetime allowance of £1.25 million, so that you keep the existing lifetime allowance before it reduces.  However, you cannot accrue any further pension rights.  This does not mean growth but it means additional pension benefit increases or pension contributions by you or your employer.  These must stop for you to qualify for fixed protection.  The change here is that HMRC no longer require you to register for fixed protection as this is deemed to automatically apply provided you have not accrued any further pension benefits after April 2016.  If you comply with this, your lifetime allowance can be fixed at £1.25 million.

Individual protection

This is where individuals have already exceeded the new £1 million lifetime allowance threshold as at April 2016 and can continue to accrue pension rights without affecting their Individual protection arrangements.  For example: at April 2016 you have pension rights accrued of £1.15 million.  This is £100,000 below the old lifetime allowance of £1.25 million and £115,000 above the new reduced lifetime allowance of £1 million.  Using individual protection, your lifetime allowance will be set at £1.15 million and will be adjusted in proportion when if subsequent lifetime allowances increase.  You can continue to accrue pension rights (which would exceed your own Individual protection allowance and the excess would be taxable.  You must register with HMRC within three years.

Comment

This is yet another way of taxing 'middle England' as we believe the lifetime allowance is getting ridiculous now.  If the maximum you can build up in a pension fund is £1 million then using current annuity rates, this means that you can only hope to achieve an overall pension of £25,000 per annum.  This is hardly inspirational and does not reward higher earners or those that work hard and save hard for their retirement.

Individual protection and fixed protection 2016 are complex matters and you should contact us for advice if you have pension funds built up circa £1 million.