Individual Protection 2014

Introduction

The standard LTA will reduce from £1.5 million to £1.25 million on 6 April 2014.  To assist individuals who have built up pension savings based on the current LTA, protection from the LTA charge is available in the form of FP14 (please see our Alert for details) and IP14.

In this Alert:

• Key points 
• Background
  
• How IP14 will work
  
• How do the different protections interact?
  
• Are there any restrictions on IP14?
  
• Applying for IP14
  

Key points

• The standard LTA will fall to £1.25 million from 6 April 2014.
• FP14 is available for pension savers who may be affected by the reduction in the LTA, but is subject to a number of restrictions on future pension savings.  Applications for FP14 must be received by HMRC by 5 April 2014 at the latest.
• IP14 is available for those who wish to protect their current benefits from the reduction in the LTA whilst retaining the ability to continue saving.
• Applications for IP14 will be possible from August 2014.  The deadline for applying is 5 April 2017.
• Anyone considering an application for FP14 or IP14 should seek independent financial advice.

Background

The LTA is the total amount of tax relieved pension savings that an individual can build up across all registered pension schemes over their lifetime, without incurring a tax charge.

For this purpose, DC benefits are generally assessed by reference to the value of the individual’s pot and, for DB savings, it is the capital value of the pension (using a factor of 20).

How IP14 will work

IP14 is a new protection which will be introduced under the Finance Bill 2014.  It will allow individuals to protect the value of their pension savings as at 5 April 2014, up to an overall maximum of £1.5 million.  For example, an individual with pension savings of £1.3 million on 5 April 2014 who applies for IP14 will have a personalised LTA of £1.3 million.  But, if an individual’s pension savings exceed £1.5 million on 5 April 2014, their personalised LTA will be capped at £1.5 million.

An individual’s personalised LTA will not increase unless the standard LTA increases to a level which exceeds it, at which point the individual would revert to the standard LTA.

How do the different protections interact?

Individuals with primary protection are excluded from applying from IP14.  However, it will be possible to hold both IP14 and either FP12 or FP14.  In addition, in a move away from HMRC’s original proposals, individuals with enhanced protection will be able to apply for IP14 provided that they do not also hold “dormant” primary protection (an individual has “dormant” primary protection where they have both enhanced and primary protection).

Enhanced and FP12 / FP14 will take precedence over IP14, with the individual able to rely on the higher LTA.  But, if any of the former are lost, IP14 will kick in.

Are there any restrictions on IP14?

In contrast to the rules on FP14, individuals with IP14 will not be subject to any restrictions on future pension savings.  However, depending on the level of the standard LTA when the individual ultimately takes their benefits, any increase in their pension savings above the personalised LTA on or after 6 April 2014 may be subject to a tax charge.

In addition, if an individual’s pension rights are subject to a pension debit on divorce, their protected LTA may be reduced or cease to apply.  Anyone with IP14 whose pension savings are subject to a pension debit must therefore inform HMRC within 90 days of a pension sharing order taking effect.

Applying for IP14

HMRC recognises that anyone wishing to apply for IP14 will need to have their pension savings accurately valued as at 5 April 2014.  Individuals will therefore have until 5 April 2017 to apply for IP14 using form APSS240.  This form will be available from HMRC’s website around the middle of August 2014.

Of course, an individual wishing to rely on IP14 may well retire before this date.  Possible options available to members in these circumstances include deferring taking their benefits until IP14 has been obtained or taking benefits up to the £1.25 million LTA and deferring the excess.  Trustees faced with this situation should seek advice from their usual Sackers’ contact.

Action points

Whether or not to apply for IP14 is a question for an individual.  Pension scheme trustees have no obligation to assist with this process and must not provide any form of financial advice.  However, they should aim to ensure that their administrators have accurate records of those individuals who have obtained any form of protection from an LTA charge.