Five years on – why protection 2016 could still save the day

The Chancellor’s announcement to freeze the lifetime allowance came as no shock, given the story had been leaked a few days earlier. What was slightly surprising was the length of the freeze – all the way up to and including the 2025/26 tax year.

It’s worth noting this is an immediate halt – as opposed to an increase this April then retaining the status quo, as is the case with Income Tax bands and allowances. Although with September 2020’s CPI sitting at only 0.5%, we had been expecting an increase to the lifetime allowance of less than £6,000 for 2021/22, so this isn’t a significant immediate loss of allowance for those taking benefits in the next 12 months.

However, the freeze for five years will have a much more widespread impact. If we’d had the expected increase in 2021/22 to £1,078,900, then increases at 1.8% (in line with the OBR’s forecasts on CPI), we’d have had an allowance of £1,158,700 by 2025/26. That’s £85,600 higher than the frozen level of £1,073,100 – meaning an additional £21,400 of tax-free cash would have been available. Significantly, it will also draw many more people into the lifetime allowance charge net.

It’s important then to remember that the latest pair of lifetime allowance protections – fixed protection 2016 and individual protection 2016 – are still available with no deadline having been set for applications.

Of course, not every client with lifetime allowance issues is going to be eligible for either form of protection, but they could be valuable for those who are.

Fixed protection 2016 (FP16)

FP16 gives an individual a lifetime allowance of £1.25 million. The main criteria to apply is that there can be no contributions or relevant benefit accrual on or after 6 April 2016. For many clients, this will instantly rule it out – especially with auto-enrolment for those who have been employed in this period.

For those who haven’t built up benefits in the last five years and don’t have any other forms of protection, then an online application can be made. The process is straightforward, and no calculations are needed. There is no minimum level of pension that must have been held on any date, they just need to have been a member of a registered pension scheme on 6 April 2016.

There will be clients who stopped benefit accrual as they were getting close to the lifetime allowance, but wouldn’t have exceeded it, and who now will. FP16 could be very valuable here.

Individual protection 2016 (IP16)

To be eligible for IP16, the individual must have had pension savings valued at more than £1 million at 5 April 2016. The protection gives a personal lifetime allowance of whatever that amount is, up to a maximum of £1.25 million. So IP16 will usually give a lower level of protection than FP16, but the good news is that benefits can continue to have accrued. For those who have made the odd contribution in the last five years, this is good news.

Again, applications are online only – but the process is more complex. The information required to apply includes the ‘relevant amount’. This is the sum of potentially four amounts as at 5 April 2016:

1. pre-6 April 2006 pensions;
2. pensions that came into payment in the period 6 April 2006–5 April 2016;
3. pension savings that have not yet been accessed; and/or
4. pensions savings not yet taken in certain overseas pension schemes.

There are prescribed criteria for how each of these is valued and you need to obtain this information from each scheme the client was a member of at 5 April 2016.

Using the protections

When a successful application has been made, the individual will receive two reference numbers from HMRC – a protection notification number and a scheme administrator reference. They will need to provide these to the scheme administrator when they wish to use the protection to take benefits, or at age 75.

It’s also worth noting that these protections can also be applied for posthumously. If a pension member passes away before the age of 75 without accessing all their pension, then there is a lifetime allowance test on the uncrystallised funds. It is the responsibility of the personal representative to carry out this test, based on information provided by the scheme administrator(s). The personal representative can apply for either of the 2016 protections, which may reduce or remove any lifetime allowance charge that would otherwise be payable by the beneficiaries.

These protections aren’t going to work for all those with lifetime allowance issues, but the potential number of clients that they could help just went up.

This article was previously published by Professional Paraplanner