The lifetime allowance (LTA) is being reduced to £1m from 6 April 2016, and as in previous years, HMRC is introducing protection for those with existing pension funds who are adversely affected by the reduction.
As was the case when the LTA was reduced in 2014, two forms of protection for accrued rights will be available:
- Fixed Protection 2016 – which provides a LTA of £1.25m which will be lost if there is further accrual; and
- Individual Protection 2016 – which will set the LTA at the value of the individual’s accrued rights on 5 April 2016 (capped at £1.25m).
In the latest edition of HMRC’s pension schemes newsletter, HMRC has clarified that members seeking to claim Fixed Protection 2016 or Individual Protection 2016 cannot use the interim process until 6 April 2016, as the interim application requires knowledge of an individual’s state of affairs on 5 April 2016.
Those claiming Individual Protection 2016 must inform HMRC of the value of their pension fund on 5 April 2016, and those claiming Fixed Protection 2016 will have to declare that they do not have any other form of protection. Scheme members who take benefits in reliance of the interim process must then complete the application for protection using the online digital service which will be available in July 2016. If a scheme member is not planning to take benefits between 6 April 2016 and July 2016, they should wait and apply for protection using the online digital service which will be available in July 2016.
Trustees of DB and DC schemes should be aware that members may wish to avail themselves of these protections to avoid potential adverse tax consequences. A lower LTA will mean more DC members will need to estimate whether investment returns could take them above the threshold when considering whether to add to their pension savings.
In order to qualify for Fixed Protection 2016, members will need to have stopped building up benefits under all registered pension schemes to which they belong by 5 April 2016. In this situation, there cannot be any benefit accruals on the member’s behalf on or after 6 April 2016. Trustees should therefore deal with any requests to leave the scheme on this basis promptly, and also be aware that there may be members requesting a valuation of their fund from 5 April 2016 in respect of the Individual Protection 2016.
This Bulletin is for general information only and should not be relied upon as advice on your specific circumstances. If you wish advice on any issues highlighted in this bulletin, please contact Andrew Holehouse, Louisa Knox or Edwin Mustard on +44 (0)131 473 5385.