Primary and Individual Protection Flashcards
Who was Primary Protection available for?
Primary protection was available for individuals with total pension rights both crystallised (pre 2006) and uncrystallised (post 2006) valued at more than £1.5million at 5 April 2006 and had applied for primary protection before 6 April 2009.
How is the PP lifetime allowance enhancement factor calculated at A day?
(£ fund value - £1.5million) / £1.5million = PP factor In other words, this is the % factor by which the SLA at ADAY (or the underpinned LTA of £1.8m post 2012) is increased; it is in addition to the standard lifetime allowance or in addition to the underpinned LTA, applicable from 2012.
What is meant by the underpinned LTA?
The underpinned LTA was introduced in 2012 in response to the reduction in the LTA from £1.8m to £1.5m. The underpinned LTA for primary protection was kept at £1.8m to prevent people going back to A day protection levels. Therefore, post 6 April 2012, the lifetime allowance enhancement factor is applied to the underpinned LTA of £1.8m.
How is a pension debit applied to Primary Protection holders?
If someone has a pension debit applied to them, their lifetime allowance enhancement factor has to be recalculated as if it was back at 5 April 2006.
I.e. benefits worth £3m at 5 April 2006 would have an LTA enhancement factor of 1.0 ((3.0 - 1.5) / 1.5) which equals an LTA of £3.6m post 2012. (1.8m x 100% = £3.6m)
If a pension debit is applied at any point in the future, say £1m on the above benefits, the new PP factor would be 33.33. The £1m debit is applied to benefits as if it was at A day, so £3m - £1m.
Enhancement factor = ((£2m - £1.5m) / £1.5)) = 33.33%
This is the only was Primary Protection can be lost - if the pension debit reduces the pension rights to under £1.5m on the recalculation.
How are BCE events measured pre and post 2012 when holding Primary Protection?
- Post 2012
- The lifetime allowance is calculated as £1.8m increased by the enhancement factor
- This is the maximum LTA with primary protection enhancement, and will not increase in the forseeable future.
- For all BCE events post-2012, they are NOT revalues in any way, shape or form.
- The BCE valuations are applied directly to the enhanced, underpinned Primary Protected LTA
- Pre 2012
- For BCE’s before 6 April 2012 and measured against the PP LTA post 2012, they ARE revalued.
- BCEs are revalued using the formula:
- BCE amount x [£1.5m / SLA at BCE]
- Eg. a BCE of £1.6m in 2011/2012 when the LTA was £1.8m would be revalued as:
- £1.6m x (£1.5m / £1.8m)
-
= £1.33m (this is the ‘revalued’ BCE figure)
*
With Primary Protection and TFC, you can have different TFC entitlements, these are:
- 25% of £1.5m
- if you have not registered your tax-free cash and do not have scheme specific TFC entitlement
- for those in this category who have taken previous TFC amounts, they are revalued using the following formula:
- TFC amount x [£1.5m / higher of £1.5m and SLA at the time]
- Scheme specific protected TFC (>25% of fund value)
- Registered TFC (RTFC) (>£375k entitlement at A day)
- RTFC amount is increased by the growth in the standard lifetime allowance between 6 April 2006 and the date that the benefits are taken
- eg. Pension worth £3m at 5 April 2006
- TFC entitlement = £2m
- His RTFC rights in the current TY are 1.8 / 1.5 x £2m
- = £2.4m
Taking a protected tax free lump sum in stages, with RTFC:
- £3m pension
- £2m TFC at 5 April 2006
Takes £1m TFC in 2008/9
What is available in the current TY?
- In 2008/9 RTFC entitlement = £2.2m
- £2m x 1.65 (SLA) / 1.5
- His current RTFC entitlement is £2m x 1.8 / 1.5 = £2.4m
- The figure from 2008/9 must be revalued and taken from his full entitlement:
- TFC amount x (1.8m / SLA at TFC withdrawal)
- (1.8 / 1.65) x £1m = £1,090,090
This leaves an RTFC amount of £2.4 - £1.09m = £1.31m in the current year.
If no lump sum rights were registeredm an individual with primary protection will retain a right to a lump sum of 25% of £1.5m when the SLA was reduced to below £1.5m.
Those in this category who have taken previous TFC amounts will have them revalued with the following formula:
TFC amount x (£1.5m / higher of £1.5m and SLA at time)
Primary protection key points:
- Primary protection was introduced to protect people with total benefits of £1.5m or more on 5 April 2006.
- Those with primary protection can continue to accrue benefits after 6 April 2006.
- Those with primary protection have a personal lifetime allowance which is calculated based on their lifetime allowance enhancement factor (LAEF).
- Where benefits exceed the member’s personal lifetime allowance the excess is subject to an LTA excess tax charge.
- Primary protection can’t be revoked, and can only be lost (or reduced) in the event of a pension debit (as a result of a pension sharing order on divorce).
Why primary protection was introduced?
Primary protection was introduced by Finance Act 2004 to protect anyone who would exceed the newly introduced lifetime allowance from the full extent of lifetime allowance excess tax charges. This form of protection was available to anyone whose total benefits (crystallised and uncrystallised) from registered pension schemes on 5 April 2006 were valued as £1.5m or more (the lifetime allowance at 6 April 2006).
Individual protection 2014 and 2016, key points:
- The closing date for Individual Protection 14 was 5 April 2017, however, Individual Protection 16 is still available.
- There is no application deadline for Individual Protection 16, but you can’t hold it if you already have Primary Protection or Individual Protection 14.
- 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.
- Scheme members can apply for Individual Protection 16 via their HM Revenue and Customs online services account.
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 2014 and 2016 and Individual Protection 2014 and 2016:
Individual protection 2014:
- Eligibility?
- Interaction with other protections?
- Operation of IP14?
- Reduction or loss of 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 2012 Fixed Protection or 2014 Fixed Protections. 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.
- IP14 works 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 2014, subject to the cap.
- If, at any time in the future, the standard LTA increases above the individual’s personalised LTA the standard LTA will apply. Should the standard LTA then reduce below the personalised LTA then the personalised LTA will again apply.
- Unlike Enhanced, and both Fixed Protections it is possible to maintain contributions and accrual in pension schemes without losing IP14.
- The personalised LTA will be ‘fixed’, there will be no uprating.
- Benefits in excess of the personalised LTA at a benefit crystallisation event (BCE) will be subject to the LTA charge in the normal way.
Individual protection 2016:
- Eligibility?
- Interaction with other protections?
- Operation of IP16?
- Reduction or loss of 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.
- IP16 works 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.
- If, at any time in the future, the standard LTA increases above the individual’s personalised LTA the standard LTA will apply. Should the standard LTA then reduce below the personalised LTA, the personalised LTA will again apply.
- 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. There will be no uprating.
- Benefits in excess of the personalised LTA at a BCE will be subject to the LTA charge in the normal way.
How are benefits valued for the purpose of applying for IP14?
- IP2014 - benefits had to be higher than £1.25m on 5 April 2014
- Uncrystallised
- Money purchase benefits held on 5 April 2014
- Defined enefits = 20 x annual rate of pension + lump sum on 5 April 2014
- Crystallised (BCEs)
- BCE value x (£1.5m / SLA at time of BCE)
- Pre A-day benefits are valued as normal at BCE event date, but then revalued by {£1.5m / SLA from time of BCE} to get correct valuation.
- Uncrystallised
