On 6 April 2014, the Lifetime Allowance for tax-efficient pension savings will reduce from £1.5m (or £75,000 per annum) per person to £1.25m (or £62,500 per annum). Hogan Lovells has warned that anyone who already has pension savings of £1.5m could incur a tax charge of up to £137,500 after this reduction if they do not have protection.
To protect against this potential tax charge, individuals can apply to HM Revenue & Customs (HMRC) for fixed protection 2014 — meaning tax-efficient pension savings of up to £1.5m per person will continue to be available after the Lifetime Allowance reduces. This is primarily likely to benefit high-earning individuals with pension savings worth more than £1.25m.
However, Hogan Lovells warns that there are significant restrictions for individuals with fixed protection 2014 alone:
- Depending on the type of pension scheme, any contributions made or benefit accrual after 4 April 2014 is likely to result in fixed protection 2014 being lost
- Remaining eligible for certain types of lump-sum death benefit — including making contributions towards a registered life-assurance policy after 5 April 2014 where the policy proceeds alone are paid on death — results in the loss of fixed protection 2014
- Joining a new pension scheme and making transfers outside the permitted criteria also leads to fixed protection 2014 being lost
These restrictions are tested on an ongoing basis and it is possible for fixed protection 2014 to be lost at any time, even inadvertently and without the individual’s knowledge. Failing to inform HMRC of the loss of fixed protection can result in financial penalties.
The solution, according to Hogan Lovells, is to also apply for individual protection 2014. This gives individuals tax-efficient pension savings up to the level of their benefits on 5 April 2014 (subject to a maximum of £1.5m). The protected amount will therefore be personal to each individual. Unlike fixed protection, individual protection 2014 also allows individuals to continue to accrue benefits in pension schemes after 5 April 2014 without jeopardising the protection.
Individual protection 2014 can be combined with fixed protection 2014 (and fixed protection 2012 for individuals who applied for fixed protection before 6 April 2012). The advantage of applying for both forms of protection is that, even if fixed protection 2012 or 2014 is lost due to a breach of the restrictions mentioned above, an individual can fall back on individual protection 2014.
Commenting on the protections available for pensions savers, Hogan Lovells’ head of pensions, Jane Samsworth, said: ‘The issue of pension savings protection is a valid concern for high earners who stand to lose a significant sum should they be unaware of and fail to apply for the protections available.
‘Individual protection 2014 provides a useful additional safeguard to fixed protection 2014 and high earners might therefore wish to take advantage of both tax-efficient forms of protection for pension savings.
‘The good news is that the deadline for applying for fixed protection is not until 5 April 2014 and applications for individual protection will not begin until then, with a deadline of 5 April 2017, so the application process for each protection will take place at different times. There is still time for concerned individuals to protect their savings if they act soon.’