City Trustees - part of Mattioli Woods

News and Media

04 March 2014

Fixed protection vs individual protection: getting the protection right

For those likely to be affected by the reduction in annual allowance to £1.25m, applying for Fixed Protection 2014 may be the automatic option. However, for those clients who qualify, consideration should also be given to applying for Individual Protection 2014, either in conjunction with Fixed Protection 2014 (and indeed Fixed Protection 2012) or as an alternative.

Whilst any individual can apply for Fixed Protection 2014, only those with pension savings above £1.25m on 5 April 2014 are able to apply for Individual Protection 2014. Compared to fixed protection, which provides a fixed limit of £1.5m, individual protection will effectively protect the member's value of pension benefits held as at 5 April 2014, subject to a maximum of £1.5m.

Fixed Protection 2014 will provide a fixed protection of up to £1.5 million before any charges apply. However, under individual protection, a member will suffer a lifetime allowance (LTA) charge on any growth above their individual protection level.

For example, Mr A has benefits at £1.3m as at 5 April 2014. At retirement, this has grown to £1.6m. With Fixed Protection 2014, there would be a LTA charge on the excess of £100,000 when taken. Under individual protection, only the value as at 5 April 2014 is protected, resulting in an excess over the personal LTA of £300,000. In this case, clearly Fixed Protection 2014 would have been more beneficial but there are several instances where consideration should be given to individual protection.

Individual protection allows an individual to make further contributions, or accrue relevant benefits. This could be valuable where an employee wishes to retain the benefit of employer contributions, even if a tax charge is paid on this further accrual after 5 April 2014. It can prove beneficial on a 'just in case' basis, where contributions may be inadvertently made. It would also allow an individual to contribute to their fund in order to make up for investment losses.

Individual protection can also be combined with Fixed Protection 2012 and 2014 as well as enhanced protection, but not with primary protection (or those with enhanced and dormant primary protection). Enhanced protection, Fixed Protection 2012 or Fixed Protection 2014 remain dominant, allowing protection up to a member's current protection limits provided no further contributions are made, whilst retaining the flexibility to make further contributions and fall back on individual protection if this proves to be more beneficial.

Whilst Fixed Protection 2014 must be applied for by 5 April 2014, there will be a three year window from 6 April 2014 up to 5 April 2017 to apply for individual protection, and indeed application forms won't be available until August 2014 (after the Finance Bill 2014 has received Royal Assent). It is important to note that eligibility for individual protection is based on the value of benefits as at 5 April 2014 and those who may benefit, but are currently short of £1.25m, may wish to consider a contribution in the current tax year to bring them to this level.

For some clients, the choice between Fixed Protection 2014 and/or Individual Protection 2014 may not be a straightforward one and, indeed, those with previous forms of protection may also benefit from electing for individual protection, where possible.


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