In the Budget on 8 July 2015 the Chancellor of the Exchequer confirmed that, as previously announced, the lifetime allowance for pension savings will be reduced from £1.25 million to £1 million from 6 April 2016. The lifetime allowance will also be indexed annually in line with the Consumer Prices Index (CPI) from 6 April 2018.
From April 2016 there will be two protection regimes available; Individual Protection 2016 (IP2016) and the Fixed Protection 2016 (FP2016). We understand there will be no application deadline for these protections however you will need to apply for protection BEFORE you take your benefits.
This means that if you want to rely on IP2016 or FP2016 you should apply before you take any benefits on or after 6 April 2016. This is so that those benefits can be tested against the higher Lifetime Allowance (LTA) provided by these protections rather than the £1 million standard LTA.
HMRC are introducing a new online self-service system for pension scheme members to apply for protection. This service will be available for you to use from July 2016. This process will require you (or your authorised representative) to provide similar information and declarations as for FP2014 and IP2014, this is likely to be the capitalised value of your pension benefits as at 5th April 2016 and details of any other forms of protection you may have previously obtained from HMRC.
We include details of the capital value of your police pension as an amount and as a percentage of the standard LTA in your Annual Benefit Statement. You will no longer receive a lifetime allowance protection certificate, instead once you have successfully applied for protection the online service will provide you with a reference number which you MUST provide to your pension scheme administrator.
HMRC are also introducing an online service for scheme administrators to check the protection status of their scheme members.
Legislative provisions in relation to the protections will be in the Finance Bill 2016 and on 22 October 2015 the Financial Secretary to the Treasury announced that draft clauses for the Finance Bill will be published for consultation on 9 December 2015 with the consultation closing on 3 February 2016.
There will be a period between the new protection regimes becoming available in April 2016 and the introduction of the new online self-service in July 2016. For this period HMRC will introduce an interim process for pension scheme members who want to take benefits before the introduction of the new online service. You will be able to write to HMRC between April 2016 and July 2016; they will check the details of your protection and respond to you in writing. You should then send this to XPS Pensions Unit in advance of your full application being made after July 2016.
Individual Protection 2014
Please remember that you can still apply for Individual Protection 2014 to protect any pension savings built up before 6 April 2014 from the LTA charge (subject to an overall maximum of £1.5 million).
Applications can be made online and there is an online tool to help you decide whether to apply for IP2014 which can be found at Lifetime Allowance Checking Tool.
Other protections already held
If you have previously obtained protections against earlier reductions in the lifetime allowance, it is your responsibility to check that the conditions required to keep the protection remain valid. If the conditions are no longer met, you must inform HMRC within 90 days otherwise you become liable for penalties of up to £300 for failure to notify and also daily penalties of up to £60 per day. Once a protection has been lost, you will only be able to rely on the standard lifetime allowance in force at the date your benefits are paid.
Current legislation limits the amount of tax relief you are allowed whilst saving into a pension scheme. There are two allowances which apply. The annual allowance limits tax free savings over a year whilst the lifetime allowance limits the total value of benefits when they come into payment. Where these limits are exceeded you may have to pay a tax charge on the excess.
Over successive budgets since 2010 the government has reduced these allowances, with the annual allowance being cut from £255,000 to £50,000 and the lifetime allowance from £1.8m to £1.5m.
From the tax year 2014-15 onwards the annual allowance will go down to £40,000 and the lifetime allowance will be £1.25m.
The Government has introduced new 'protections' that allow individuals to retain a higher lifetime allowance, subject to certain restrictions-
Fixed protection 2014 (FP14)
If you expect your total pension savings from all pension schemes to be more than £1.25 million (including taking into account past benefit crystallisation events) when you come to take your benefits on or after 6 April 2014, you can use FP14 to help reduce or eliminate the lifetime allowance charge.
Having FP14 protection will mean that you will have a protected lifetime allowance of £1.5 million. However if you want to rely on FP14, there are restrictions on what you will be able to do with your pension savings. For example after 5 April 2014 you will normally need to stop building up benefits in every registered pension scheme that you belong to.
If you decide to apply for FP14 your completed application (form APSS228) must be received by HMRC by 5 April 2014.
You can apply by post or online - www.hmrc.gov.uk/pensionschemes/pension-savings-la.htm
The government has also decided to introduce an additional form of protection to offer individuals more flexibility in how they protect their savings. This is called "individual protection 2014".
Individual protection 2014 (IP14)
If you expect to have pension savings of more than £1.25 million on 5 April 2014, IP14 will allow you to protect those savings (up to a value of £1.5 million), as long as you don't have primary protection.
IP14 will give you a protected lifetime allowance equal to the value of your pension savings on 5 April 2014 subject to an overall maximum of £1.5 million. Unlike FP14 there are no restrictions on future pension savings, although if they exceed your protected lifetime allowance the excess will be subject to the lifetime allowance charge.
IP14 will be available even if your pension savings on 5 April 2014 have a value of more than £1.5 million. As the maximum protected lifetime allowance you can have with IP14 is £1.5 million, any savings in excess of this will not be protected and will be subject to the lifetime allowance charge when you crystallise your benefits.
Although IP14 will operate from 6 April 2014, the protection will not be available until after the Finance Bill 2014 has received Royal Assent. The application form to apply for IP14 (APSS240) will therefore only be available from the date the supporting regulations come into force which is likely to be around the middle of August 2014. You will not be able to complete your application form for IP14 until then. It is expected that you will have up until 5 April 2017 to submit your IP14 application form to HMRC.
Where can I get more information?
HMRC have produced full guidance (including calculators and worked examples) on how tax reliefs and tax charges for pension schemes work and they can be found at:
How will I know if I exceed the annual or lifetime allowance?
We include details of the capital value of your police pension as an amount and as a percentage of the standard LTA in your Annual Benefit Statement.
IMPORTANT: If you already hold primary, enhanced or fixed protection (2012) or you receive 'fixed protection 2014', you must send a copy of the certificate to the Pensions Unit. We will record the details so that you benefit from protection when you retire, provided you continue to meet the eligibility criteria.
Please note: it is your responsibility to check your on-going eligibility for protection and report any loss of eligibility to HMRC within 90 days of the loss. Failure to do so or to not provide a copy of a protection certificate to the Pensions Unit may result in a financial penalty and/or incorrect tax charges being deducted from your retirement benefits.