Protection options explained

Primary protection protected a multiple of the standard lifetime allowance - or £1.8m while the allowance when this high. The pension commencement lump sum as a monetary value increased in line with standard lifetime allowance. This form of protection cannot be lost and contributions can be continue to be made into the pension.

Enhanced protection is a protection from all lifetime allowance charges. The pension commencement lump sum is set as a percentage of benefits taken. Enhanced protection can be lost or revoked and any further contributions or defined benefit accrual in excess of HMRC set limits (see below in relation to fixed protection) cannot be made.

Fixed protection 2012 protects up to a lifetime allowance of £1.8m. Any contributions and defined benefit accrual above HMRC limits mean the protection is lost.

It was also possible to apply for scheme specific protection to protect a pension commencement lump sum greater than 25 per cent of fund value in scheme at A Day. This can be lost on transfer.

For this year following the latest cull in the lifetime allowance, we have fixed protection 2014 and individual protection.

Fixed Protection 2014 will enable your clients to retain a lifetime allowance of £1.5m. The completed form FP14 must be returned directly to HM Revenue & Customs before 6 April 2014.

Once fixed protection has been granted, HMRC will issue your client with a fixed protection certificate. It is also possible to apply online, in which case HMRC will acknowledge receipt of your application by email.

The following conditions will have to be met to maintain fixed protection:

1) No new contributions can be paid to a money purchase arrangement after 5 April 2014

2) The amount of benefits you can build up each year under a defined benefits arrangement or cash balance arrangement after 5 April 2014 will be limited to the ‘relevant percentage’ which is either:

• An annual rate used to increase rights and which was specified in the scheme’s rules on 11 December 2012; or

• The percentage by which the consumer price index (CPI) increased in the year ending in September of the previous tax year.

3) No new pension arrangement may be started, other than to receive a transfer of rights from an existing pension arrangement. This includes joining a new death in service scheme and a pension scheme which you join under the automatic enrolment requirements

If any of these conditions are broken, FP14 will be lost, which will mean that your client’s lifetime allowance will drop to the standard lifetime allowance, and HMRC must be informed.

With Fixed Protection 2014 there is no minimum level of current pension savings that is required for registration, Adrian Walker, retirement planning lead at Skandia, points out.

He says this will enable clients who may be looking some time into the future before they need to access their current pension savings, to grow the current value of their pension savings towards a £1.5m threshold rather than £1.25m.

Mr Walker says: “For those who are not currently funding at the maximum annual allowance of £50,000 there are planning opportunities potentially available to them, before the end of this tax year to boost their savings further.”

If the deemed value of your pension pots on 5 April 2014 is £1.25m or more, it will also be possible to apply for individual protection (IP14).

At this stage, HM Revenue & Customs has only issued a consultancy paper on IP14 - albeit one which contains draft legislation - with a view to introducing legislation in the Finance Act 2014.

Although Mr Price says it is likely that some of the finer details about IP14 will change, it is likely that the principles will not.

Unlike FP14, Mr Price says under IP14 there will be no restriction on making further contributions or accruing additional pension benefits/rights on or after 6 April 2014.

He says: “This makes it an attractive solution if you will not receive any alternative remuneration from your employer if you opt-out of your pension scheme, for example, the position for most individuals in public sector schemes.”

Under the current proposals, Robert Graves, head of pensions technical services for Rowanmoor Group, says IP14 will see individuals given a personalised lifetime allowance based on the value of their pension savings at 5 April 2014 up to a maximum of £1.5m.

Mr Graves says: “Applying for fixed protection 2014 would not prevent an application for IP14 and it is expected that individuals will be able to apply for IP14 at any time within three years from 6 April 2014.

“A significant difference to fixed protection 2014 is that individuals will still be able to be an active member of a pension scheme and accrue benefits. Only funds in excess of the individual’s personalised lifetime allowance will be subject to a lifetime allowance tax charge.”

According to Mike Morrison, head of platform marketing of AJ Bell, the main downside of enhanced and the two types of fixed protection is the requirement that contributions cease and that accrual under a DB scheme, is limited to inflation proofing.