Individuals will be able to retain a lifetime allowance (LTA) above the new, lower LTA of £1.25m from April 2014. To do so they must apply for "fixed protection 2014" (FP14) or "individual protection 2014" (IP14).
HMRC has information about all the various transitional LTA protections at http://www.hmrc.gov.uk/pensionschemes/pension-savings-la.htm.
Like the corresponding protection when the LTA came down from £1.8m to £1.5m from April 2012, FP14 requires an individual to stop accruing benefits in all registered pension schemes. In practice, this means opting out of active membership.
FP14 might be useful, for example, to someone with a DC pot worth less than £1.5m in April next year that is likely to increase above £1.25m without further contributions.
HMRC has an online tool to help individuals decide whether to apply: http://www.hmrc.gov.uk/pensionschemes/fp14online.htm.
Applications must be made to HMRC on or before 5 April 2014. It encourages people to apply online.
A consultation on IP14 closed recently.
It will give someone with pension saving worth between £1.25m and £1.5m next April a personal LTA of that amount. They will be able to continue saving without limit in a registered scheme but the LTA tax charge will apply to the excess over their personal LTA.
For example, someone with an account worth £1.35m will have that as their personal LTA. If they continue saving in a registered scheme, the LTA tax charge will apply on the excess over £1.35m when they draw their benefits.
Someone with an account worth more than £1.5m who applies for IP14 will have a personal LTA of £1.5m.
IP14 might be attractive, for example, to someone with a DC pot over £1.25m whose employer will not agree to replace pension accrual with any other form of pay. The individual would be able to continue to benefit from the employer’s contributions, albeit subject to the LTA tax charge (of 25% on money drawn as pension and 55% on lump sum).
HMRC’s thinking is that more flexibility over protection is required as the LTA comes down and affects more people.
Individuals with primary or enhanced protection (which date from A Day) will not be eligible for IP14. But someone will be able to hold IP14 at the same time as either FP12 or FP14. Fixed protection will take precedence.
Next year’s Finance Bill will legislate for IP14 and it will only be possible to apply when it becomes law (which normally happens in July). The plan is to allow people three years to apply.