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Individual Protection: What is it and should you apply?

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29/08/2014
As Individual Protection applications open, we demystify the latest question facing pension savers.

This year has seen several major changes in the pensions landscape.

Just one of these changes was a reduction in the standard Lifetime Allowance (LTA) for pension savers – or, put simply, the maximum amount a person can save towards their retirement without paying a high rate of tax. As of 6 April 2014, the LTA was reduced from £1.5m to £1.25m, leaving anyone who had saved to the previous threshold facing some serious tax implications.

To protect these savers, the government introduced various forms of “protection”, including Individual Protection. Applications opened 18 August, but do you need to apply?

Is Individual Protection relevant to me?

Individual protection is only relevant to you if you have at least the current LTA of £1.25m saved in your pension pots.

Bhargaw Buddhdev, head of executive pensions at Barnett Waddingham, says: “Individuals who had pension savings over £1.25m as at 5 April 2014 and do not have Primary Protection should apply.”

What is the purpose of individual protection?

Individual protection is there to shield you from being hit by an unfair tax bill. Anyone with pension savings between £1.25m and £1.5m saved what they believed to be an amount below their LTA, only to have the threshold lowered due to factors beyond their control. Individual Protection is intended to shield these savers from current and future decreases in the LTA allowance because, at the time they were saving, their pension pot was within the limit.

How does it work?

Individual Protection 2014 – as it is known by HMRC – applies retrospectively from 6 April 2014, the first day of the new tax year. The value of your pension pot on 5 April 2014 – if over £1.25m and up to the former threshold of £1.5m – is your new LTA.

You can still make contributions, but any amount over your individual threshold will be taxed when withdrawn at a rate of 55 per cent for a lump sum or a withholding tax of 25 per cent if the excess is taken as additional income.

What if I already have another form of protection?

Several types of protection exist, but you can still apply for Individual Protection 2014 if you have registered for Enhanced Protection, Fixed Protection 2012 or Fixed Protection 2014.

Buddhdev says: “For individuals with Enhanced Protection or either form of Fixed Protection, Individual Protection 2014 can offer a safety net where the earlier LTA protections could be inadvertently lost. Individuals should seek advice to avoid unnecessary tax bills.”

How do I apply?

You can apply online only. The deadline is 5 April 2017, so you do have time, but be aware that you will need an accurate valuation of your pension pots as of 5 April 2014. For more details visit HMRC’s website.

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