The government announced in the March 2015 Budget that it intended to reduce the lifetime allowance from £1.25m to £1m with effect from 6 April 2016.
From April 2018 the lifetime allowance will be increased annually in line with CPI. On 9 December 2015 HMRC published draft legislation confirming these changes.
As with the introduction of the lifetime allowance in 2006, and reductions in the level of the allowance in 2012 and 2014, transitional protection will be available for those who think they are likely to be caught by this new reduction and might otherwise be liable to a tax charge.
Two forms of protection will be available: Fixed Protection 2016 and Individual Protection 2016. They are modelled on the protections introduced when the lifetime allowance was reduced from £1.5m to £1.25m in 2014, and the same conditions and restrictions generally apply to them. Applications can be made online from July 2016.
Fixed Protection 2016 (FP16)
This type of protection will work in the same way as both of the previous versions of fixed protection. It will give an individual who applies for it a protected lifetime allowance of £1.25m, reverting to the standard lifetime allowance if it is increased to above £1.25m at any point in the future.
Any individual who has savings in a registered pension scheme can apply for FP16 – irrespective of the value of their savings relative to the lifetime allowance – provided they do not have certain pre-existing forms of lifetime allowance protection, namely enhanced protection, primary protection or either existing variant of fixed protection (note the exception for those who already have individual protection 2014).
Once someone has been given FP16 they must stop accruing further pension benefits. For any defined contribution schemes this is simply a matter of preventing any further contributions being paid.
For defined benefits schemes the accrual of additional benefits will invalidate FP16 if the value of the individual’s pension increases beyond the “relevant percentage” in any year. The “relevant percentage” is the annual rate of increase set out in the pension scheme’s rules on 9 December 2015 or, if no rate is specified, the annual increase in CPI.
The risk of someone losing fixed protection in this way is therefore small and manageable – individuals affected need to keep their employer informedYou should note that any mandatory increases in the value of benefits required by law are not included when working out whether benefit accrual has occurred, so in general deferred members will not be caught by this.
