With the standard LTA reducing to £1.5 million from 6 April 2012, individuals with existing pension savings need to consider whether to apply to HMRC for "Fixed Protection". However, care needs to be taken to ensure that, once gained, Fixed Protection is not lost inadvertently.
In this Alert:
- The standard LTA will fall to £1.5 million from the tax year 2012/13. This represents a significant reduction from the previous allowance of £1.8 million.
- Pension savers affected by the new LTA may apply for Fixed Protection but will be subject to a number of restrictions on pension savings going forward.
- Applications for Fixed Protection must be made in writing (not online) and be received by HMRC on 5 April 2012 at the latest.
The LTA is the total amount of tax relieved pension savings that an individual can build up over their lifetime without incurring an additional tax charge. For this purpose, DC benefits are assessed by reference to the individual's pot. For DB savings, it is the capital value of the pension, using a factor of 20.
The Coalition Government first announced that it would reduce both the LTA and the AA1
in October 2010.2 It subsequently introduced a new protection regime
- Fixed Protection - which allows individuals to retain an overall allowance of £1.8 million when the standard LTA falls to £1.5 million from 6 April 2012.3
In exchange for Fixed Protection, contributions to a DC arrangement by or on behalf of the individual will have to cease, and an individual will no longer be able to build up additional DB pension above an allowable “relevant percentage”. The ability to transfer pension benefits is also restricted.
Who should apply?4
Any individual wishing to rely on Fixed Protection can apply to HMRC - it is not necessary to have built up savings of more than £1.5 million to apply.
Those potentially affected should consider their own personal circumstances and may wish to contact their scheme administrator (the scheme trustee or manager) to confirm the current value of their pension savings. However, as neither HMRC nor pension scheme trustees can advise whether Fixed Protection should be applied for in any particular case, independent financial advice should be sought.
Factors to take into account include the impact of any extra tax the individual would be liable for following the reduction in the LTA and the potential loss of future pension savings if Fixed Protection is applied for.
Restrictions on Fixed Protection
Fixed protection will be lost:
- in a DC arrangement, if contributions are paid to the scheme by the member or someone else on their behalf, or employer contributions are paid;
- in a DB arrangement, if the pension and lump sum rights of a member increase by more than the "relevant percentage"5 at any time during a tax year. The test for benefit accrual can occur at any time up to the point when benefits are actually taken;
- if a new arrangement is established in respect of the individual; and
- on a transfer, subject to certain limited exceptions. Trustees should therefore carefully consider any transfer request from an affected member with their legal advisers.
As a result, a person with Fixed Protection will need to stop building up benefits in every registered pension scheme that they are a member of before 6 April 2012. Care will also need to be taken to prevent unintended benefit accrual which could cause Fixed Protection to be lost.
Fixed Protection - some practical pointers for individuals
Anyone wishing to apply for Fixed Protection will need to notify their employer or pension scheme in good time so that benefit accrual / contributions can be stopped before the deadline. Bank accounts should also be checked to ensure that there are no continuing direct debit payments which might unintentionally cause Fixed Protection to be lost.
If Fixed Protection is lost, the individual concerned must notify HMRC in writing. Failure to do so within 90 days of the event causing loss of Fixed Protection can result in a penalty of up to £300 and automatic daily penalties of £60 after that.
Auto-enrolment - a tricky issue
It is the responsibility of anyone with Fixed Protection6
to ensure that they do not lose it. Particular care will need to be taken once auto-enrolment begins in October 2012.
The 2008 Act introduced a requirement for employers to enrol eligible jobholders into pension saving automatically. An individual with Fixed Protection who finds themselves automatically enrolled as a result will be able to opt-out of pension saving (within one month) and be treated as never having joined their employer's auto-enrolment scheme. In these circumstances, Fixed Protection will remain intact.
However, some employers may use auto-enrolment outside the parameters of the 2008 Act. If so, there may be no legal provision to treat a person, once enrolled, as never having joined the scheme. Affected individuals should therefore notify their employer or prospective employer so that auto-enrolment in these circumstances can be avoided.
Impact on primary and enhanced protection
Individuals already entitled to primary protection and/or enhanced protection will not be eligible for Fixed Protection.
The good news is that anyone with either enhanced or primary protection will be unaffected by the reduced LTA. This is because individuals with enhanced protection are not liable to an LTA charge even if their savings exceed the LTA. In addition, for those with primary protection, an individual's enhanced LTA will continue to be calculated as though the LTA of £1.8 million still applies.
How to apply
Applications for Fixed Protection must be made to HMRC using form APSS2277
(there is no facility to make an online application) and must be received by HMRC on 5 April 2012 at the latest. HMRC will not extend this deadline in any circumstances.
The application form is short and there is no need to state the value of the individual's pension savings.
HMRC aims to start issuing certificates confirming Fixed Protection from 12 October 2012 onwards. However, anyone intending to take benefits between 6 April 2012 and 31 July 2012 should inform HMRC as soon as possible so that their Fixed Protection certificate can be issued before their retirement or the date of taking benefits.
1 The AA was reduced to £50,000 from its previous level of £255,000 from 6 April 2011
2 For more information, please see our Alert: “Restricting pensions tax relief: the verdict” (dated 14 October 2010)
3 For more information, please see our Alert: "Restricting of pensions tax relief: further developments" dated 15 December 2010)
4 HMRC has published a Special Edition Newsletter aimed at those considering applying for Fixed Protection
5 The relevant percentage is the rate specified in the scheme rules on 9 December 2010 by which a member's rights are increased annually or, where there is no such rate, the annual rate of increase in CPI for the year ending with the previous September's CPI figure
6 Enhanced protection can also be lost as a result of auto-enrolment
7 Completion notes to accompany form APSS227 are also available from HMRC's website