What is individual protection?
For the first six years after it was introduced, the lifetime allowance increased each year. However, from April 2012 it began to decline: it dropped in 2012 (from £1.8m to £1.5m), 2014 (from £1.5m to £1.25m) and again in 2016 (from £1.25m to £1m).
When the first drop happened in 2012, the only form of protection made available was fixed protection 2012, which allowed people to keep a higher lifetime allowance but prevented them from making any further pension savings. When the lifetime allowance dropped again in 2014, individual protection was introduced. It still allowed investors to protect some of their pension savings from the drop, but gave them more flexibility to make further pension savings in the future.
There are two versions of individual protection: one for 2014 and one for 2016.
Who was eligible to apply for individual protection?
You could apply for individual protection 2014 as long as you didn’t already have primary protection, and the value of your pensions on 5 April 2014 was more than £1.25m. You can apply for individual protection 2016 as long as you don’t already have primary protection or individual protection 2014, and the value of your pensions on 5 April 2016 was more than £1m.
Can I still apply for individual protection?
You can still apply for individual protection 2016 if you meet the eligibility criteria. Individual protection 2014 is no longer open for applications.
How does individual protection work?
Individual protection gives you a protected allowance based on the value of your pensions at the point the lifetime allowance dropped. There are specific rules for how to value your pension for this purpose.
For individual protection 2014 your protected amount can be between £1.25m and £1.5m, and for individual protection 2016 it can be between £1m and £1.25m. These maximums make sure that you can’t protect funds which already would have been above the lifetime allowance before it dropped.
For example, if the value of your pensions on 5 April 2014, according to the special valuation process, was £1.4m, then your individual protection certificate would give you a protected lifetime allowance of £1.4m.
Does individual protection increase PCLS (tax free cash) entitlement?
Yes. You will be entitled to up to 25% of your protected lifetime allowance amount, instead of 25% of the standard lifetime allowance.
Can I lose individual protection?
If you get divorced, your pension may be subject to a ‘pension sharing order’. A pension sharing order is issued following a divorce settlement so that funds can be transferred from one person’s pension to the other’s. If funds are taken from your pension (known as a ‘pension debit’) and you hold individual protection, your protection will need to be revalued.
Firstly, the value of the pension debit itself is revalued: it is reduced by 5% for every complete tax year since the protection took effect. The new value of the pension debit is then deducted from the value of your pensions as at 5 April 2014 or 16, which would have been used to find your original individual protection amount. A new individual protection amount is then issued using this new figure. Your pension debit may be large enough to cause you to lose individual protection altogether.
If your individual protection is reduced or lost due to a pension debit, your previous benefit crystallisation events (BCEs) aren’t reassessed. You will be subject to your new lower lifetime allowance (or the standard lifetime allowance) for any BCEs you have after your pension sharing order takes effect.