Fixed Protection 2014: Deadline countdown
With the standard LTA reducing to £1.25 million from its current level of £1.5 million from 6 April 2014, individuals with existing pension savings who have not already done so should consider now whether to apply to HMRC for FP14.
In this Alert:
- Key points
- Restrictions on FP14
- Providing life cover benefits
- Beware automatic enrolment
- Applying for FP14
- The standard LTA will fall to £1.25 million from 6 April 2014 – a further significant reduction in the LTA which was £1.8 million as recently as the tax year 2011/12.
- Pension savers potentially affected by the reduction in the LTA may apply for FP14, but will be subject to a number of restrictions on pension savings going forwards.
- Applications for FP14 must be received by HMRC by 5 April 2014 at the latest.
- Individuals who already have Primary Protection, Enhanced Protection orFP12 will not be affected by the further reduction in the LTA and will not normally be able to apply for FP14.
- In addition, a new form of protection from the LTA charge, known asIndividual Protection 2014, will be introduced in the Finance Bill 2014 (due to be published on 27 March 2014). The deadline for applying for IP14 is 5 April 2017.
- Anyone considering applying for FP14 should seek independent financial advice.
The LTA is the total amount of tax relieved pension savings that an individual can build up across all registered pension schemes over their lifetime, without incurring a tax charge. For this purpose, DC benefits are generally assessed by reference to the value of the individual’s pot and, for DB savings, it is the capital value of the pension (using a factor of 20).
FP14 is based on the Fixed Protection regime introduced in 2012 (see our Alert: Fixed Protection: the deadline approaches). It allows an individual to maintain an LTA of the greater of £1.5 million and the standard LTA. But, in return for this protection, the ability to accrue further pension benefits is limited.
FP14 can be lost in a number of circumstances:
- 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” in any given tax year. The relevant percentage for the purposes of FP14 is usually either the annual rate of revaluation specified in the scheme rules as at 11 December 2012 or, if no such rate is specified, CPI for the year ending with the previous September’s CPI figure
- in a hybrid arrangement, on the payment of a relevant contribution or an increase in benefits above the relevant percentage
- if a new arrangement is established in respect of the individual
- on a transfer, subject to certain limited exceptions.
If FP14 is lost, the affected individual must notify HMRC within 90 days of the triggering event.
For individuals with FP14 there is a risk that protection may be lost as a result of continuing life cover after 5 April 2014. This is similar to the situation with FP12 and Enhanced Protection and a particular risk, if:
- the individual with FP14 is put into a new life assurance arrangement by their employer; and/or
- premiums are paid in respect of the individual in to a DC life cover arrangement.
For further details, see our Alert: Fixed protection: last minute guidance from HMRC (30 March 2012).
To overcome the potential life cover hurdle, a number of employers are turning to Excepted Group Life Policies. Such policies are not registered pension schemes for the purposes of the Finance Act 2004 and therefore allow individuals with protected tax status to continue in, or commence, life cover without disrupting their tax protection.
At present, an individual with FP14 who is automatically enrolled into pension saving will need to opt out within the statutory one month timeframe. By opting-out, the individual will be treated as though they have never been a member of a pension scheme and their tax protection will not be jeopardised.
As this creates an unnecessary administrative burden, the DWP has been exploring the possibility of excluding specified groups of individuals from the employer’s automatic enrolment obligations. In its recent response to consultation on possible exceptions to the auto-enrolment duty, the DWP notes that it is continuing to consider workable exceptions “that provide real value for both individuals and employers”. It is also looking into ways of accommodating circumstances where an employer may not know about the person’s individual circumstances, such as whether or not they have protected tax status.
Where employers meet their automatic enrolment obligations contractually, as opposed to using the statutory automatic enrolment procedure, members will not have an automatic right to opt out and be treated as never having been a member of the scheme, unless the scheme rules explicitly provide for this. Communications concerning auto-enrolment should therefore flag this.
Any individual wishing to rely on FP14 can apply to HMRC if they anticipate their pension savings will ultimately exceed £1.25 million. It is not necessary for the individual to have benefits of a specific value at the time they apply FP14.
Having registered for FP14, the individual needs to remember the circumstances in which the protection can be lost, including making DC contributions or accruing DB benefits in excess of the relevant percentage.
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 FP14 should be applied for in any particular case, independent financial advice should be sought.
HMRC also has an online tool to help individuals decide whether they should apply for FP14.