What is Fixed Protection 2016?
Fixed Protection 2016 (“FP 2016”) came into force on 6 April 2016, as the new standard lifetime allowance has been reduced from £1.25 million to £1 million. FP 2016 offers individuals the opportunity to protect their pension pot as at 5 April 2016 (worth up to £1.25 million) from an additional tax charge. Should you exceed your lifetime allowance, upon reaching retirement you will receive a statement from your pension provider telling you how much tax you owe. Your pension provider will then deduct the tax before you start getting your pension.
FP 2016 requirements and losing protection
In order to benefit from FP 2016, an individual must meet certain requirements pursuant to legislation:
- They must have one or more arrangements under a registered pension scheme or a relieved non-UK pension scheme of which they are a member;
- No other protections have been claimed (i.e. primary, enhanced, or any previous fixed protection); and
- No protection-cessation event has occurred between 6 April 2016 and the date on which they wish to rely on the protection.
Although an individual may claim FP 2016, this protection may be lost if a protection-cessation event occurs. Such events include: starting a new pension arrangement under a registered pension scheme; an unpermitted transfer of an amount or assets to or from the scheme; making further contributions or accruals to any benefits; or where there is an impermissible transfer into an arrangement.
Where an individual is auto-enrolled into a pension arrangement by their employer they will need to opt-out within one month to avoid their FP 2016.
FP 2016 and Pension Sharing Orders
Pension credit rights may be provided in certain instances (such as when a Pension Sharing Order (“PSO”) is granted). This may result in an increase to an individual’s liability to the lifetime allowance charge. To address this issue, legislation allows for an ex-spouse or former civil partner to offset this increased liability by claiming a lifetime allowance enhancement factor (“Pension Credit Factor”). This is allowed, provided that certain conditions are met.
Credit rights granted on or after 6 April 2006
Where pension credit rights were acquired on or after 6 April 2006:
- The pension credit must be held in a registered pension scheme;
- The pension credit must derive from a pension benefit from the same or another registered pension scheme that was already in payment to the original member at the time of the PSO; and
- The original member must become entitled to that pension in payment on or after 6 April 2006.
Once these requirements have been met, the Pension Credit Factor will be offset against the lifetime allowance of the individual when calculating the lifetime allowance.
The formula for this calculation involves taking the appropriate amount of pension credit rights attributable to a post commencement pension in payment, and dividing it by the lifetime allowance at the time the rights were acquired. This calculation will leave the individual with a Pension Credit Factor. This factor will then be applied to the lifetime allowance at any future benefit crystallisation event to provide an uplift/offset to the individual’s lifetime allowance.
Credit rights granted before 6 April 2006
Where pension credit rights were acquired before 6 April 2006, a Pre-commencement Pension Credit Factor (“PPCP”) could be given to an individual to uplift to the individual’s lifetime allowance, provided that the individual notified HMRC by 5 April 2009 of any pre-commencement pension credits.
The PPCP is calculated in a similar way to that of the Pension Credit Factor. The pension credit amount is, however, affected by the percentage increase in the retail price index (“RPI”) from the month in which the rights were acquired until April 2006. This figure is then divided by the 2006/2007 lifetime allowance.
Losing FP 2016 when a PSO is granted
If the pension credit, deriving from a PSO, is transferred into an existing money purchase arrangement, the individual will still have the benefit of FP 2016. There are, however, occasions where the granting of a PSO will result in an individual losing FP 2016. These include instances where the pension credit:
- Is transferred into an entirely new arrangement for the individual;
- Is received from a non-registered pension scheme;
- Is transferred from a money purchase arrangement into an existing defined benefit or cash balance arrangement (if benefit accrual occurs); or
- Is transferred into a cash balance arrangement or a defined benefit arrangement that subsequently becomes a money purchase arrangement that is not a cash balance arrangement.
How to apply
The government is yet to provide a deadline for FP 2016 applications and so anyone (who satisfies the requirements as described above) is able to apply from 6 April 2016 onwards. There is also no minimum pension value required to apply for FP 2016. At present there is an interim application process where applicants can download a standard form letter produced by HMRC, filling in relevant details and then submitting it to HMRC. From July 2016 onwards, a new online process will be available to apply for FP 2016. For those who do not plan on taking benefits before July 2016, they should wait for the new online process, so as to avoid having to apply twice for FP 2016 (both interim and online applications).
In relation to PSOs, an individual who has been granted pension credit rights must notify HMRC by completing form APSS201 (no later than 5 years after 31 January following the tax year when the PSO took effect). HMRC will then issue a certificate to confirm the Pension Credit Factor that the individual is entitled to.