Individual Protection can help mitigate tax charges

Published: 26 Jun 2017

The UK Government’s reductions in the lifetime allowance from £1.5million to £1.25million in 2014/15 and subsequently from £1.25million to £1million in 2016/17 have limited the amount that savers can put into a private pension fund before the excess becomes subject to relatively high levels of tax. If the fund is valued at more than the lifetime limit when they come to draw on their pension, they will be subject to a tax charge of up to 55% which will be an unwelcome surprise for those with larger funds.

However, there is an option for some to help mitigate tax charges. Individual Protection gives savers a personalised lifetime allowance based on the value of their pension savings. The Individual Protection 2016 rule gives an individual a lifetime allowance equal to the value of their pension pot on 5 April 2016, provided it was in excess of £1 million at that time and subject to a maximum of £1.25million. You can remain an active member of a pension scheme, so contributions and benefit accrual can continue under this allowance. So far there are no time limits on application. The Individual Protection 2016 allowance adapted the Individual Protection 2014 rules that offered a similar degree of flexibility. However, Individual Protection was closed in April 2017 and is no longer available. The 2014 version provided protection for someone whose pension rights were valued at over £1.25million to protect those rights subject to an overall maximum of £1.5million.

HMRC has not set a cut-off date for applications for Individual Protection 2016 but savers will need an account for HMRC Online Services to make use of it. They can set one up when they start the application and should also know what their fund or funds were worth on 5th April 2016 as well as a breakdown of the amount. If they don’t know this information, they can ask their pension scheme administrator. Importantly, if they have more than one scheme, they must add together the amounts from each scheme. As Government policy evolves to reflect wider economic and political needs, it has become even more crucial to stay on top of the allowances and options that are available with regards to pensions planning. It is a fast-changing market and, as you can see, tax treatment of pensions is a complex and fast moving business with real risks for those who do not receive independent advice, and real benefits for those who do.


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