Draft Finance Bill 2014 published

On 10 December 2013, the Government published the draft Finance Bill 2014(“the Bill”).  The Bill includes provisions which will introduce a new form of transitional protection from a potential LTA charge, to be known as Individual Protection 2014 (“IP14”).

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 an additional tax charge.  For this purpose, DC benefits are 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).

From the tax year 2014/15, the LTA will reduce to £1.25 million from its current level of £1.5 million.  (Members with a protected LTA under either enhanced or primary protection will be unaffected by this change.)

To help those most affected by the reduction in the LTA, transitional protections will be available in the form of Fixed Protection 2014 (“FP14”) and IP14.

Following a recent consultation, the Government has decided to press ahead with an additional form of protection – IP14 – to offer individuals more flexibility in how they protect their pension savings.

IP14 will entitle individuals to an LTA of the greater of the value of their pension savings as at 5 April 2014 (up to an overall maximum of £1.5 million) or the standard LTA.  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 limited to £1.5 million.

A successful applicant for IP14 will be given a personalised LTA expressed as a monetary amount.  This 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.

In contrast to the rules for FP14, individuals with IP14 will not be subject to any restrictions on future pension savings.  However, any increase above the personalised LTA on or after 6 April 2014 will be subject to an LTA charge, unless the standard LTA increases.

To apply for IP14 individuals will need to complete form “APSS240”, which will be available from HMRC’s website around the middle of August 2014.  Applications must be received by HMRC by 5 April 2017.

Individuals with primary protection are excluded from applying for IP14.  However, it will be possible to hold both IP14 and FP12 or FP14.  In addition, in a move away from its original proposals, individuals with enhanced protection will now be able to apply for IP14, provided that they do not also hold “dormant” primary protection.

Enhanced and either type of fixed protection will take precedence over IP14, with the individual able to rely on the higher LTA.  But if either enhanced protection, FP12 or FP14 are lost, IP14 will come into play.