Fixed Protection deadline approaching
The lifetime allowance is reducing from £1.8 million to £1.5 million with effect from 6 April 2012.
With the lifetime allowance being reduced, there is an opportunity to apply for lifetime allowance protection called fixed protection. Fixed protection preserves the lifetime allowance at the current level of £1.8 million.
If a member already has primary or enhanced protection, they cannot apply for fixed protection. However, if the member has enhanced protection but not primary protection they may benefit more from fixed protection and may wish to consider lapsing their enhanced protection. Primary protection cannot be lapsed, so fixed protection is not an option if they already have primary protection .
Whether to apply for fixed protection is an important consideration for members with pension funds worth more than £1.5 million, or which could be worth more than £1.5 million by the time retirement benefits are taken. HM Revenue and Customs (HMRC) offers fixed protection guidance on its website.
If the member intends for further contributions to be paid into their scheme, or they are still an active member of a final salary scheme, then fixed protection may not be appropriate.
Fixed protection will be lost if, after 5 April 2012, a contribution is paid into a money purchase pension scheme, or if benefits accrue in a final salary scheme at an annual rate in excess of the Consumer Prices Index (CPI), or another rate specified in the scheme rules if written before 9 December 2009.
Enhanced protection protects against a lifetime allowance charge up to the full value of the fund. However, the maximum tax-free pension commencement lump sum is limited to 25% of the lifetime allowance applicable at the time it is drawn, which for the tax year commencing 6 April 2012 will mean a maximum of 25% of £1.5 million, or £375,000.
Fixed protection allows for a maximum pension commencement lump sum of up to 25% of the protected lifetime allowance to be drawn, which is 25% of £1.8 million, or £450,000.
Therefore if a member has a fund value in excess of £1.5 million, with enhanced protection, it may be prudent to weigh up the benefit of a potentially higher pension commencement lump sum available under fixed protection against the possibility of a higher lifetime allowance charge.
The form that needs to be completed to claim fixed protection is now available. To be valid, applications for fixed protection have to be received by HMRC by 5 April 2012; there are no exceptions and late claims will not be accepted.
Fixed Protection application form
Notes for completion
See also: Fixed Protection – Application Form now available from HMRC (September 2011)
