Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Pensions Tax Manual

From
HM Revenue & Customs
Updated
, see all updates

Protection from the lifetime allowance charge: individual protections 2014 and 2016: pension debits

Glossary PTM000001
   

Due to the similarities in the principles of these two types of protection this guidance covers them both unless otherwise specified and the two types of individual protection are referred to collectively on this page as “the indiviudal protections”.

Losing individual protection
Pension debit
Pension debit resulting in a reduction of individual protection
Effect of a pension debit on individual protection
Impact of pension debit on amount of protected lifetime allowance - no effect
Impact of pension debit on amount of protected lifetime allowance - protected lifetime allowance is reduced
Impact of pension debit on amount of protected lifetime allowance where debit is reduced - no effect
Impact of pension debit on amount of protected lifetime allowance where debit is reduced - protected lifetime allowance is reduced
Requirement to tell HMRC if pension rights are reduced as a result of a pension debit

Losing individual protection

Individual protection 2014 (IP 2014) - Paragraphs 1(6) to (9) Schedule 6 Finance Act 2014

Individual protection 2016 (IP 2016) - Paragraphs 9(6) to (8) Schedule 6 Finance Act 2016

There is only one situation where a member’s protection can be reduced or lost altogether. This is if, after 5 April 2014 for IP 2014 or 5 April 2016 for IP 2016, they become subject to a pension debit as a result of a pension sharing order following their divorce, as this will reduce the value of their relevant amount (see PTM094200).

Pension debit

Section 46(1) Welfare Reform and Pensions Act 1999 and Article 43(1) Welfare Reform and Pensions (Northern Ireland) Order 1999

An individual’s pension rights may be reduced as a result of the rights becoming subject to a pension debit. This happens when an individual divorces and their pension rights become the subject of a pension sharing order. A pension debit is the amount by which the value of the individual’s pension rights are reduced, with a corresponding pension credit in the same amount being given to their ex-spouse or former civil partner. The reduction due to the pension debit applies from the effective date of the pension sharing order and not, where this is later, the date on which their pension rights are actually split by their pension scheme(s).

Top of page

Pension debit resulting in a reduction of individual protection

IP 2014 - Paragraph 1(6) Schedule 6 Finance Act 2014

IP 2016 - Paragraph 9(6) Schedule 4 Finance ACT 2016

Both protections - Section 29 Welfare Reform and Pensions Act 1999 and Article 26 Welfare Reform and Pensions (Northeren Ireland) Order 1999

The amount protected will be reduced if the pension debit’s transfer day happens on or after 6 April 2014 for IP 2014 or 6 April 2016 for IP 2016. The “transfer day” is the day set out in section 29 Welfare Reform and Pensions Act 1999 or Article 26 Welfare Reform and Pensions (Northern Ireland) Order 1999.

Top of page

Effect of a pension debit on indiviudal protection

IP 2014 - Paragraph 1(6) - (9) Schedule 6 Finance Act 2014

IP 2016 - Paragraph 9(6) -( 8) Schedule 4 Finance Act 2016

If a member become subject to a pension debit their individual protection will be reduced by the amount of the pension debit. However, if the transfer day occurs on or after 6 April 2015/6 April 2017 then (for IP 2014/IP 2016 purposes only) the amount of the pension debit is reduced by 5 per cent for each full tax year (there is no reduction for a part year) that has elapsed since tax year 2013-14/tax year 2015-16. The member’s relevant amount is then reduced by that reduced pension debit.

Where the pension debit reduction results in a member’s relevant amount being less than £1.25 million/£1 million they will lose their individual protection and revert to the standard lifetime allowance. The standard lifetime allowance will only apply to any benefit crystallisation events (see PTM088000) that take place after the member’s rights have been reduced by the pension debit. So if a member has already relied on their indiviudal protection to take benefits in excess of the standard lifetime allowance before their rights are reduced, these remain protected.

Top of page

Impact of pension debit on amount of protected lifetime allowance - no effect

Gianni has no protection other than IP 2014. The value of his pension savings on 5 April 2014 was £1.7 million. This is Gianni’s relevant amount and his protected lifetime allowance for IP 2014 is therefore £1.5 million.

In June 2014, Gianni’s pension rights are subject to a pension debit of £200,000 with the transfer date being 15 June 2014. As no complete tax year has elapsed, his relevant amount is reduced by reference to the full pension debit to £1.5 million. Gianni’s protected lifetime allowance however remains at £1.5 million as this is now the amount of his relevant amount.

Gianni crystallises his benefits in December 2017 when the standard lifetime allowance is £1.25 million. Gianni’s pension savings are now worth £1.6 million for lifetime allowance purposes. Gianni can take benefits valued up to £1.5 million without being subject to the lifetime allowance charge, with the charge applying to the remaining £100,000.

This example applies equally to IP 2016 - but references to 2014 need to be changed to 2016 and Gianni’s protected lifetime allowance is £1.25 million.  So for IP 2016 the charge applies to £350,000.

Top of page

Impact of pension debit on amount of protected lifetime allowance - protected lifetime allowance is reduced

Kevin has no protection other than IP 2014. The value of his pension savings on 5 April 2014 was £1.7 million. This is Kevin’s relevant amount and his protected lifetime allowance for IP 2014 is therefore £1.5 million.

In June 2014, Kevin’s pension rights are subject to a pension debit of £400,000 with the transfer date being 15 June 2014. As no complete tax year has elapsed, his relevant amount is reduced by reference to the full pension debit to £1.3 million. Kevin’s protected lifetime allowance is therefore reduced to £1.3 million.

Kevin crystallises his benefits in December 2014 when the standard lifetime allowance is £1.25 million. Kevin’s pension savings are now worth £1.6 million for lifetime allowance purposes. Kevin can take benefits valued up to £1.3 million without being subject to the lifetime allowance charge, with the charge applying to the remaining £300,000.

This example applies equally to IP 2016 - but references to 2014 need to be changed to 2016, the pension debit should be taken as £600,000 and Kevin’s protected lifetime allowance is £1.25 million.  So the relevant amount is reduced to £1.1 million for IP 2016 and Kevin’s protected lifetime allowance is similiary reduced to £1.1 million.

Top of page

Impact of pension debit on amount of protected lifetime allowance where debit is reduced - no effect

Example 1

Julie has no protection other than IP 2014. The value of her pension savings on 5 April 2014 was £1.8 million. This is her relevant amount. As Julie’s relevant amount exceeds £1.5 million, her protected lifetime allowance for IP 2014 is £1.5 million.

In March 2015 Julie crystallises benefits worth £1.4 million relying on IP 2014 to prevent a lifetime allowance charge arising as the standard lifetime allowance at that time is £1.25 million. This uses up 93.33 per cent of Julie’s protected lifetime allowance. So she has unused lifetime allowance of 6.67 per cent.

In December 2020, the value of Julie’s remaining pension rights have risen to £600,000 but are reduced by a pension debit of £400,000 as a result of a pension sharing order with a transfer date of 15 August 2020. This leaves Julie with £200,000 of pension rights.

By 15 August 2020, six complete tax years have passed since tax year 2013-14. So the pension debit that is applied to her relevant amount is reduced by 30 per cent to £280,000. Julie’s £1.8 million relevant amount is therefore reduced to £1.52 million because of the reduced £280,000 pension debit. Julie’s protected lifetime allowance therefore remains at £1.5 million.

Julie crystallises her remaining £200,000 pension rights in March 2021 when the standard lifetime allowance is, for example, £1.25 million. Julie has 6.67 per cent remaining lifetime allowance available. Applying this percentage to her protected lifetime allowance of £1.5 million produces an amount of £100,050 as available lifetime allowance. Julie is therefore subject to a lifetime allowance charge on £99,950.

Example 2

Julie has no protection other than IP 2016. The value of her pension savings on 5 April 2014 was £1.55 million. This is her relevant amount. As Julie’s relevant amount exceeds £1.25 million, her protected lifetime allowance for IP 2016 is £1.25 million.

In March 2017 Julie crystallises benefits worth £1.1 million relying on IP 2016 to prevent a lifetime allowance charge arising as the standard lifetime allowance at that time is £1 million. This uses up 88 per cent of Julie’s protected lifetime allowance. So she has unused lifetime allowance of 12 per cent.

In December 2022, the value of Julie’s remaining pension rights have risen to £600,000 but are reduced by a pension debit of £400,000 as a result of a pension sharing order with a transfer date of 15 August 2022. This leaves Julie with £200,000 of pension rights.

By 15 August 2022, six complete tax years have passed since tax year 2015-16. So the pension debit that is applied to her relevant amount is reduced by 30 per cent to £280,000. Julie’s £1.55 million relevant amount is therefore reduced to £1.27 million because of the reduced £280,000 pension debit. Julie’s protected lifetime allowance therefore remains at £1.25 million.

Julie crystallises her remaining £200,000 pension rights in March 2021 when the standard lifetime allowance is, for example, still £1 million. Julie has 12 per cent remaining lifetime allowance available. Applying this percentage to her protected lifetime allowance of £1.25 million produces an amount of £150,000 as available lifetime allowance. Julie is therefore subject to a lifetime allowance charge on £50,000.

Top of page

Impact ofpension debit on amount of protected lifetime allowance where debit is reduced - protected lifetime allowance is reduced {#}

Example 1

Irmgard has no protection other than IP 2014. The value of her pension savings on 5 April 2014 was £1.4 million. This is her relevant amount. As Irmgard’s relevant amount is less than £1.5 million, her protected lifetime allowance for IP 2014 is £1.4 million.

In March 2015 Irmgard crystallises benefits worth £1.3 million relying on IP 2014 to prevent a lifetime allowance charge arising as the standard lifetime allowance at that time is £1.25 million. This uses up 92.85 per cent of Irmgard’s protected lifetime allowance. So she has unused lifetime allowance of 7.15 per cent.

In December 2020, the value of Irmgard’s remaining pension rights have risen to £150,000 but are reduced by a pension debit of £100,000 as a result of a pension sharing order with a transfer date of 15 August 2020. This leaves Irmgard with £50,000 of pension rights.

By 15 August 2020, six complete tax years have passed since tax year 2013-14. So the pension debit is reduced by 30 per cent to £70,000. Irmgard’s relevant amount is therefore reduced to £1.33 million because of the reduced £70,000 pension debit. Irmgard’s protected lifetime allowance is now also £1.33 million.

Irmgard crystallises her remaining £50,000 benefits in March 2021 when the standard lifetime allowance is, for example, £1.25 million.

As Irmgard has £95,095 remaining lifetime allowance available (£1.33 million x 7.15 per cent), she is not subject to a lifetime allowance charge.

Example 2

Irmgard has no protection other than IP 2016. The value of her pension savings on 5 April 2016 was £1.2 million. This is her relevant amount. As Irmgard’s relevant amount is less than £1.25 million, her protected lifetime allowance for IP 2016 is £1.2 million.

In March 2017 Irmgard crystallises benefits worth £1.1 million relying on IP 2016 to prevent a lifetime allowance charge arising as the standard lifetime allowance at that time is £1 million. This uses up 91.66 per cent of Irmgard’s protected lifetime allowance. So she has unused lifetime allowance of 8.34 per cent.

In December 2022, the value of Irmgard’s remaining pension rights have risen to £150,000 but are reduced by a pension debit of £100,000 as a result of a pension sharing order with a transfer date of 15 August 2022. This leaves Irmgard with £50,000 of pension rights.

By 15 August 2022, six complete tax years have passed since tax year 2015-16. So the pension debit is reduced by 30 per cent to £70,000. Irmgard’s relevant amount is therefore reduced to £1.13 million because of the reduced £70,000 pension debit. Irmgard’s protected lifetime allowance is now also £1.13 million.

Irmgard crystallises her remaining £50,000 benefits in March 2023 when the standard lifetime allowance is, for example, still £1 million.

As Irmgard has £94,242 remaining lifetime allowance available (£1.13 million x 8.34per cent), she is not subject to a lifetime allowance charge.

Top of page

Requirement to tell HMRC if pension rights are reduced as a result of a pension debit

IP 2014 - Regulation 9 of the Registered Pension Schemes and Relieved Non-UK Pension Schemes (Lifetime Allowance Transitional Protection) (Individual Protection 2014 Notification Regulations 2014 - SI 2014/1842

IP 2016 - Paragraph 18 Schedule 4 Finance Act 2016

IP 2014

If, at any time after HMRC has issued an IP 2014 certificate, a member’s pension rights become subject to a pension debit, the member must inform HMRC accordingly about this within 60 days of the date of the pension debit. The date of a pension debit is the date on which the notice of discharge of liability is issued under regulation 8(1) of the Pensions on Divorce etc. (Provision of Information) Regulations 2000 SI 2000/1048.

HMRC must be provided with the following information:

  • the date of the pension debit ,
  • the amount of the pension debit (see PTM094100)
  • the net amount of the pension debit taking into account any required reduction to this.

The legislation does not specify how the information should be provided to HMRC so it can be by post, phone or any online facility HMRC makes available for this purpose

HMRC will then either revoke the member’s IP 2014 certificate if their relevant amount is reduced to £1.25 million or less, or issue a replacement certificate in relation to the reduced relevant amount if this is still in excess of £1.25 million.

If this information is not provided within 60 days the member may be liable to penalties.

IP 2016

An individual must notify HMRC if they receive a discharge notice related to a pension debit - i.e. a notice of discharge of liability in relation to a pension credit corresponding to the pension debit issued under regulation 8(2) or (3) of the Pensions on Divorce etc. (Provision of Information) Regulations 2000 (S.I. 2000/1048) - at a time when any of the following circumstances apply:

  • the individual has been issued with a reference number following a successful application for IP 2016,
  • the individual has a pending application for an IP 2016 reference number.  A pending application is one where the individual has (a) made an application but does not yet know if it has been successful (i.e. they have not been issued with a reference number) or (b) has not been told their application has been successful on a dormant basis or (c) the application has been unsuccessful but an  appeal is in progress against HMRC’s refusal to issue a reference number (an appeal, including a further appeal, is in progress for so long as it has not been either withdrawn or determined and there is no prospect of further appeal, or
  • an appeal is in progress against HMRC’s decision to withdraw the individual’s FP 2016 reference number.

Where any of the above circumstances apply, the individual must notify HMRC of both the “appropriate amount” of the pension debit (see PTM094100) and the “transfer day” as defined by section 29 Welfare Reform and Pensions Act 1999 or Article 26 of Welfare Reform and Pensions (Northern Ireland) Order 1999 (SI 1999/3147 (NI 11)).

The notice must be given to HMRC within 60 days of the date of the discharge notice related to the pension debit. Notice must be given either using the online facility provided by HMRC for this purpose or by any other means authorised by HMRC in a particular case.

HMRC will then either withdraw the member’s IP 2016 reference number if their relevant amount is reduced to £1 million or less, or issue a replacement reference number in relation to the reduced relevant amount if this is still in excess of £1 million.

If this information is not provided within 60 days the member may be liable to penalties.