Individual Protection

Last Updated: 6 Apr 24 10 min read

Individual Protections were introduced when the Lifetime Allowance reduced in 2014 and 2016.   The protections carried over into the current pension regime after the abolition of the LTA on 6th April 2024. 

Key Points

  • The closing date for Individual Protection 14 was 5 April 2017.
  • The application deadline for Individual Protection 16 is 5th April 2025.
  • It’s possible to hold Individual Protections 14 and 16 with another form of protection such as fixed or enhanced protection.
  • Individual Protection 14 and 16 may be reduced or lost if an individual becomes subject to a pension debit as a result of a pension sharing order following divorce.
  • When a scheme member wants to take benefits they have to tell the scheme administrator that they have individual protection.

Introduction of Individual Protection

As a result of the reductions in Lifetime Allowance from £1.5m to £1.25m in 2014/15 and from £1.25m to £1.0m in 2016/17, four new transitional protection regimes were introduced: Fixed Protection and Individual Protection 2014 and 2016. This article will explore Individual Protection 2014 (IP14) and Individual Protection 2016 (IP16).

Impact of Lifetime Allowance abolition on Individual Protection.

The Spring Budget 2023 announced the abolition of the LTA from 6th April 2024.

Individual Protection continued into the new pension regime.  It effects the amount of an individuals Lump Sum Allowance and Lump Sum and Death Benefit Allowance. 

 

 Individual Protection 

Lump Sum and Death Benefit Allowance

Lump Sum Allowance

2014

Between

£1,250,000 and £1,500,000

Between 

£312,500 and £375,000

2016

Between

£1,073,100 and £1,250,000

Between 

£268,275 and £375,000

Unlike Fixed and Enhanced Protection it has always been possible to make contributions and accrue benefits without losing the protection.

Scheme Specific Protected Tax Free Cash and Standalone Lump Sums can both be paid when Individual Protection is held, subject to the normal conditions for payment of these lump sums.

Individual Protection 2014

The closing date for IP14 was 5 April 2017, so it’s no longer possible to apply for IP14.

Eligibility

Those who applied before 6 April 2017, with pension savings in excess of £1.25 million on 5 April 2014 and who did not hold Primary Protection were eligible.

Interaction with other protections

It was not possible to apply for IP14 if Primary Protection was held.

It was possible to hold IP14 along with Fixed Protection 2012 or 2014. In that case Fixed Protection will take precedence. It is also possible to hold IP14 along with Enhanced Protection. In that case Enhanced protection will take precedence.

Operation of IP14

Successful applicants received a personalised lifetime allowance equal to the value of their pension savings as at 5 April 2014 – the "relevant amount".

This was capped at £1.5 million.

Prior to the abolition of the LTA IP14 worked such that the individual would benefit from a personalised lifetime allowance (LTA), instead of the standard LTA, for all purposes of Part 4 of Finance Act 2004. This personalised LTA was equal to the value of the individual's pension benefits as at 5 April 2014, subject to the cap.

Post LTA abolition the protected amount is used for the individuals LSA and LSDBA.

Unlike Enhanced, and both Fixed Protections it is possible to maintain contributions and accrual in pension schemes without losing IP14.

The personalised LTA was ‘fixed’. 

Valuation of Benefits

In essence, benefits were valued in the same way they were valued for primary protection at A-day.

There are 4 elements that needed to be valued;

Benefits Valuation Basis
Uncrystallised Funds

Money Purchase - aggregate of cash value and market value of other assets of the arrangement(s).

Defined Benefit - 20 x pension assuming entitlement to it arose on 5 April 2014 plus the value of any lump sum payable (other than by commutation).

Rights already tested against LTA

Value of benefits crystallised at the time they were tested, adjusted to reflect changes in the standard LTA between that date and 5 April 2014.

This can be found through the formula: Value of prior BCE x (£1,500,000 / LTA at time of prior BCE)

The figure of £1.5m is used as this was the LTA at 5 April 2014.

If possible the actual amount should be used rather than the percentage. This is because the amount will provide a higher value as the LTA percentage was rounded down to two decimal places.

Pensions already in payment at A-Day

25 x pension amount (or Maximum GAD*) at earlier of the first post A-day BCE or 5 April 2014.

Value to be adjusted to reflect changes in the standard LTA.

UK Tax Relieved Non-UK Pension Schemes

Broadly, these are non-UK schemes where some value has accrued from UK tax relieved contributions or accrual after 5 April 2006.

QROPS would meet this condition but are excluded as the transfer to the QROPS would be part of the post A-day BCEs (rights would have already been tested & so benefits are calculated on that basis, as described earlier.)

It is the total pension input amounts, using the annual allowance rules, that are tested against the LTA. This is known as the "relieved amount".

The value used for IP14 will be the relieved amount at 5 April 2014 that has not been tested against the LTA.

*For Flexible Drawdown from pre A-day drawdown arrangements the last available Maximum GAD figure should be used.

*Where the first BCE occurs after 5th April 2015 the maximum GAD needs to be multiplied by 80% to reduce the new maximum GAD of 150% back down to the 120% GAD figure (120/150 = 0.80).

There are worked examples of the valuation methods in chapter 3 of the Guidance Notes (PDF).

Reduction in or loss of IP14

There is only one situation where an individual may have IP14 protection reduced or lost. This is if, after 5 April 2014, an individual becomes subject to a pension debit as a result of a pension sharing order following divorce, as this will reduce the relevant amount. If this is after 6 April 2015 then, for IP14 purposes only, the debit is reduced by 5% for each complete tax year that has elapsed since 2013/14.

The member is required to notify HMRC of any pension debit applying. HMRC will issue a new certificate where the reduced amount is still over £1.25 million.

Where the reduced amount is lower than £1.25m then IP14 will be lost.

Notification must be made within 60 days, beginning with the date of the discharge notice relating to the pension debit. The legislation doesn’t specify how notification is made so post, phone or online. The member may be liable to penalties if they don’t notify HMRC within 60 days.

The individuals LSA and LSDBA going forward will presumably have to be recalculated based on the new "relevant amount".

Increase in IP14

A person with IP14 can have this still apply for one or more of the available lifetime allowance enhancement factors (apart from primary protection) in the normal way. There is a cut off date of 5th April 2025.

Taking Benefits and Protection

When the member wants to take benefits they must tell the scheme administrator that they have individual protection. The scheme administrator is required to notify HMRC where individual protection has allowed more tax free lump sum to be paid to the individual than would have been allowed under the standard rules. 

Individual Protection 2016

It is important to note that although there is an application deadline of 5th April 2025 for IP16, the statutory obligation on scheme administrators to provide values at 5 April 2016 only applied for 4 years. Therefore the scheme may no longer have these records.

PTM164120

Members wishing to rely on IP16 should apply and receive the appropriate permanent protection reference number before the relevant benefit crystallisation event (RBCE) on which they wish to use IP16.  

Eligibility

Those with pension savings in excess of £1.0 million on 5 April 2016 and who do not hold Primary Protection, or IP14.

Interaction with other protections

It is not possible to hold IP16 with Primary Protection, or if IP14 is already held.

It is possible to hold IP16 along with Fixed Protection 2012, 2014 and 2016. In that case Fixed Protection will take precedence. It is also possible to hold IP16 along with Enhanced Protection. In that case Enhanced protection will take precedence.

Operation of IP16

Successful applicants will get a personalised lifetime allowance equal to the value of their pension savings as at 5 April 2016 - the "relevant amount".

This will be capped at £1.25 million.

Prior to LTA abolition IP16 worked such that the individual will benefit from a personalised lifetime allowance (LTA), instead of the standard LTA, for all purposes of Part 4 of Finance Act 2004.  This personalised LTA will be equal to the value of the individual's pension benefits as at 5 April 2016, subject to the cap.

Post LTA abolition the protected amount is used for the individuals LSA and LSDBA.

Unlike Enhanced and any Fixed Protection it is possible to maintain contributions and accrual in pension schemes without losing IP16.

The personalised LTA will be fixed. 

Valuation of Benefits

In essence, benefits will be valued in the same way they were valued for primary protection at A-day.

As well as basic information (name, date of birth and national insurance number) and confirmation that the member did not hold primary protection or Individual Protection 2014 at 5 April 2016, the scheme member will need to provide HMRC with amounts A to D and their total relevant amount. The total relevant amount is the sum of amounts A to D (A+B+C+D) below.

Please note pension schemes were only obliged to retain this information until 5 April 2020.

Amount A

The amount of pensions in payment before 6 April 2006, valued at 5 April 2016.

1. Assuming no benefit crystallisation event (BCE) before 6 April 2016

Amount A is 25 x ARP

Where -

ARP* is an amount equal to -

The annual rate at which any relevant existing pension was payable to the individual on 5th April 2016, or

If more than one relevant existing pension was payable to the individual at that time, the sum of the annual rate at which each of the relevant existing pensions was so payable.

* ARP for drawdown, as covered in the Finance (No 2) Bill 2015/16, is 80% of the maximum amount that may be paid in the drawdown pension year. Further details are covered in Finance Act 2004, Schedule 36, Paragraph 20(4).
 

2. If there has been a BCE between 6 April 2006 and 5 April 2016 it’s slightly different.

Amount A is - 25 x ARP x £1,250,000/SLT

Where -

ARP is an amount equal to -

The annual rate at which any relevant existing pension was payable to the individual at the time immediately before the BCE occurred, or

If more than one relevant existing pension was payable to the individual at that time, the sum of the annual rate at which each of the relevant existing pensions was so payable.

SLT- is an amount equal to what the standard lifetime allowance was at the time the benefit crystallisation event occurred

Amount B

The amount of benefits crystallised between 6 April 2006 and 5 April 2016, valued at 5 April 2016.

Amount B is -

Value of benefits crystallised at the time they were tested, adjusted to reflect changes in the standard LTA between that date and 5 April 2016.

This can be found through the formula: Value of prior BCE x (£1,250,000 / LTA at time of prior BCE).

The figure of £1.25m is used as this was the LTA at 5 April 2016.

Amount C

The amount of uncrystallised pension savings in UK registered pension schemes valued at 5 April 2016.

Amount C is -

Money purchase - aggregate of cash value and market value of other assets of the arrangement(s).

Defined Benefit - 20 x pension assuming entitlement to it arose on 5 April 2016 plus the value of any lump sum payable (other than by commutation).

Cash balance arrangement – the amount available on 5th April 2016 for the provision of immediate benefits (assuming you were entitled to receive them on that day).

Amount D

The amount of uncrystallised pension savings in relieved non-UK pension schemes valued at 5 April 2016.

Amount D is determined by -

  • To determine amount D

    • Identify each relevant non-UK pension scheme of which the individual is a relieved member at the end of 5th April 2016, and

    • In relation to each such scheme-

      • Assume that a benefit crystallisation event occurs in relation to the individual at the end of 5th April 2016, and

      • Determine what the untested portion of the relevant relieved amount would be immediately before the assumed benefit crystallisation event.
         
  • Amount D is the sum of the untested portions determined under sub-paragraph (1)(b)(ii) above.

Scheme members should ensure that these details are included and correct because HMRC will reject applications for protection with incomplete information or if amounts A to D do not add up to the relevant amount provided by the member.

Reduction in or loss of IP16

There is only one situation where an individual may have IP16 protection reduced or lost. This is if, after 5 April 2016, an individual becomes subject to a pension debit as a result of a pension sharing order following divorce, as this will reduce the relevant amount. If this is after 6 April 2017 then, for IP16 purposes only, the debit is reduced by 5% for each complete tax year since 2015/16 and the time of the pension debit.

A member in receipt of, or applying for, or is making an appeal in relation to IP16 is required to notify HMRC by means of the digital service, of any pension debit applying. Notification must be made within 60 days, beginning with the date of the discharge notice relating to the pension debit

Where the reduced amount is lower than £1.0 million then IP16 will be lost.

The individuals LSA and LSDBA going forward will presumably have to be recalculated based on the new "relevant amount".

Increase in IP16

A person with IP16 can still apply for one or more of the available lifetime allowance enhancement factors (apart from primary protection) in the normal way. There is a cut off date of 5th April 2025.

Death prior to IP16 application

There is provision for an individual's personal representatives to apply for IP16.

How to apply for Individual Protection 16

There is no application deadline for IP16, however, members wishing to rely on IP16 should apply and receive the appropriate permanent protection reference number before the benefit crystallisation event (BCE) on which they wish to use IP16. Members can apply for IP16 via their HM Revenue and Customs (HMRC) Online Services account. Full details are available at https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance.

This will require the member (or their authorised representative) to provide information and declarations as detailed above. The online system will provide the member with a response to the notification and a protection reference number (authorised representatives will need to contact HMRC), Protection certificates will no longer be issued so it is important that applicants take a note of their protection reference number as the member will need to provide this to their pension scheme in order to take their benefits using Individual Protection. The protection number will be in the following format, IP16 followed by 10 digits and 1 letter, for example IP161234567890B.

Members who were crystallising benefits from 6 April 2016, until the online self-service portal became available at the end of July 2016, were able to apply for the required protection using an interim paper based process. This interim process was available up to 31 July 2016. Any paper applications received by HMRC after this date were returned and the member directed to the online service to make their application. Those members who took advantage of the interim process were issued with a temporary protection notification number.

HMRC will check their records against the details the scheme member provides to ensure that the declarations are correct.

Find us on LinkedIn

Sign up below where you will be the first to see any news, views or support we think matters. 

Sign up