Fixed Protection 2016 and Individual Protection 2016

In order to avoid paying a steep tax for breaching new lifetime allowance rules, pension savers will now be required to apply online for protection. This allowance refers to exactly how much a pension saver can put away without having to pay tax on the sum – any funds that breach the set LTA limited being subject to taxation.

When the most recent pensions and savings reforms went live in April this year, the total permitted tax-free allowance fell to £1 million from the previous £1.25 million. This immediately saw a huge contingency of savers suddenly find themselves in line for a hefty tax payment, at the time they access their retirement funds.

However, HM Revenue & Customs introduced a new online service this week that will allow pension savers to protect their savings, with an allowance higher than the current cap.

“Anybody who hasn’t applied for either the Fixed Protection 2016 or Individual Protection 2016 schemes will, from July 31, no longer apply in writing, but will have to apply online,” said Adrian Walker, retirement planning expert with Old Mutual Wealth, the retirement income provider.

“If HMRC receives any new applications on paper, they will be returned to the applicant and they will be advised to apply online.”

There are two types of protection available – the first being fixed protection. This option would allow a saver to hold onto the same LTA cap of £1.25 million as before the reforms, though with the proviso that they must cease adding to their pension pot as of April this year. The alternative is individual protection, which gives the saver the right to carry on saving, though only protects the value of their benefits up to the £1.25 million cap. The pot must have also had a value of at least £1 million on April 5 this year.

The online service was launched this week and HMRC is yet to announce any kind of cut-off date for applications. Nevertheless, experts advise getting started with the process as soon as possible, to avoid unnecessary complications. 

Speaking on behalf of Old Mutual Wealth, Mr Walker warned that existing Individual Protection 2016 and Fixed Protection 2016 applicants provided with a temporary reference number by HMRC will only be protected until August 31.

“Temporary protection will only last until August 31 with HMRC saying that after that they will only recognise permanent reference numbers,” he said.

“It’s very important for those people who had temporary protection to go online and reapply for a permanent reference number by the end of August, or they risk being left without protection.”

Pension savings and protection of your lifetime allowance can be a difficult subject to grasp, which is why it is always worth considering seeking independent financial advice. The pension reforms of last April have certainly opened up several new avenues to explore, though doing so under the guidance of an impartial professional can help ensure the best opportunities are not overlooked.