Pension Debits and Individual Protection 2014

I was recently asked a question about a member with Individual Protection 2014 (‘IP 2014’) and exactly how this is affected where the member becomes subject to a pension debit under a Pension Sharing Order.

My enquirer was aware that the pension debit has an impact on the member’s IP 2014 position and that there is some sort of 5% a year reduction factor that needs to be applied, but was not sure how everything fitted together and what, exactly, actually needs to be reduced to reflect the pension debit.

This query brings together a couple of many peoples least favourite subjects – pension sharing and Lifetime Allowance protections.?I was, however, able to explain how it all works here.

As part of their application to HMRC for IP 2014 status, an individual had to provide HMRC with details of the value of all of their benefits, under all registered pension schemes (and, where appropriate, all relieved non-UK pension schemes of which the individual was a relieved member) as at 5 April 2014.

These values had to be specified as four amounts (Amounts A – D), as detailed in the PTM.?Importantly for this query, the aggregate of these four amounts is known as the individual’s relevant amount. If the individual’s relevant amount exceeded ￡1,250,000, they could claim IP 2014 status.

Where, on or after 6 April 2014, the individual becomes subject to a pension debit, then their IP 2014 position must be reassessed.?What actually happens here is that the member’s relevant amount is reduced to reflect the pension debit.

The reduction to the member’s relevant amount is based on the actual amount of the pension debit, however that amount is discounted at a rate of 5% (simple) for each complete tax year that has elapsed between 6 April 2014 and the effective date of the Pension Sharing Order.

This leads to three possible outcomes:

- The reduction the member’s relevant amount due to the pension debit could mean that the member’s relevant amount is reduced to below ￡1.25 million (the standard LTA on 6 April 2014), in which case the member loses their IP 2014 status and reverts to the usual standard LTA.?

- The reduction to the member’s relevant amount due to the pension debit could have no impact at all on the member’s IP 2014 LTA.?

For example, suppose that as at 5 April 2014, the member had benefits valued at ￡3 million – the maximum they could protect under IP 2014 was only ￡1.5 million. If this member became subject to a pension debit later in 2014 (just so that we don’t need to consider the 5% reduction for the purposes of this simple example) of ￡500,000, then the value of the member’s relevant amount (￡3 million) must be reduced by ￡500,000.?This still leaves an adjusted relevant amount of ￡2.5 million, which is well above the ￡1.5 million maximum for IP 2014 and the member’s IP 2014 position remains unchanged.?

- The reduction to the member’s relevant amount due to the pension debit could result in the member’s IP 2014 LTA being reduced.

Suppose that the member’s relevant amount, as at 5 April 2014, was ￡1.8 million. If the member later becomes subject to a pension debit and the “post 5% per tax year reduction adjustment” for this pension debit is ￡400,000, then the member’s IP 2014 LTA is reduced from ￡1.5 million (this again being the maximum they could protect under IP 2014) to ￡1.4 million.

These three possible outcomes are all considered in the PTM, starting here.

Importantly, where a member with IP 2014 becomes subject to a pension debit, they are required to notify HMRC of this, within 60 days of the date on which the pension scheme issues the Notice of Discharge of Liability for the Pension Sharing Order.

On receipt of the required notice, HMRC may then revoke or replace the member’s IP 2014 certificate, depending on which of the possible outcomes detailed above applies.

Whilst this is a situation that may not arise all that often, it is still helpful to know how a pension debit may affect a member’s IP 2014 status.

Note that, although this query concerned Individual Protection 2014, the same principles apply where Individual Protection 2016 exists (although the various dates and amounts change accordingly).

Aries Insight?provides comprehensive and detailed guidance on the application of Individual Protection 2014 and pension sharing, as well as insight into the meaning and impact of UK pensions regulation and clear guidance on the practical implications for pension providers, trustees, administrators and consultants.?If you are not already an Aries member and would like to find out more about what Aries Insight can offer you, then please drop me a mail at [email protected] or give me a call on 01536 763352.

Please note that?we are not lawyers or financial advisers.?The information above sets out our best understanding of the legislation and how it applies, but should not be taken as constituting legal or financial advice.