Taking pension protection – yes or no?
You can now opt for Individual Protection 2014 to protect your pension benefits. But should you?
The lifetime allowance (LTA) effectively sets the maximum tax-efficient value of all your pension benefits. In its first iteration, in April 2006, the standard LTA was set at £1.5m. It then gradually rose to £1.8m before being cut twice: to £1.5m in April 2012 and £1.25m two years later. Accompanying the LTA’s introduction and each cut, various ‘protections’ were made available to help those people who found the value of their benefits was – or might become – greater than the new allowance.
The 2014 reduction came with two different types of protection. The first, Fixed Protection 2014, had to be claimed before 6 April 2014 and basically fixed your LTA at a minimum of £1.5m, provided no more contributions were made or benefit accrued after the end of 2013/14. The second, Individual Protection (IP 2014), was legislated for in the Finance Act 2014 and HMRC only started accepting applications in August.
You are eligible to apply for IP 2014 if, on 5 April 2014:
The value of all your pension benefits exceeded £1.25m; and
You did not have primary protection (a 2006 protection option) in force.
If you opt for IP 2014, your personal LTA will become the greater of:
The value of all your pension benefits as at 5 April 2014 (subject to a maximum of £1.5m); and
The amount of the standard LTA at the time you draw benefits.
You will not lose IP 2014 if contributions are made or further benefits accrued. However, this will only be the case if the value of your pension fund(s) fall, as their 5 April 2014 value will normally be the upper limit of your LTA.
If you have no existing protection and are eligible for IP14, then it is worth claiming – even if you are now using income drawdown – because your LTA will rise above the standard £1.25m. If you have one of the two fixed protections or enhanced protection, the decision becomes more marginal and you should take advice.