Frequently Asked Questions (FAQ)

Protection


What is primary protection?

What is a primary protection factor?

How does primary protection affect tax-free cash?

Can contributions be paid from 6 April 2006 (A-Day), where primary protection applies?

What happens if benefits are transferred and primary protection applies?

What happens to the maximum amount of tax-free cash that can be taken if contributions are paid from 6 April 2006 (A-Day) and primary protection applies?

What is enhanced protection?

In what circumstances will somebody with enhanced protection be treated as accruing further benefits?

How will enhanced protection affect tax-free cash?

Can the benefits be transferred where enhanced protection applies?

If somebody had an entitlement to more than 25% tax-free cash on A-Day and didnít apply for primary and/or enhanced protection, how much of a tax-free cash sum can they take at when retirement benefits are taken?

What happens when somebody transfers their plan and they were entitled to more than 25% tax-free cash pre 6 April 2006 (A-Day)?

What is fixed protection?

Could anybody apply for fixed protection?

Can a member apply for fixed protection at any time?

Can a member lose fixed protection?

Can the benefits be transferred where fixed protection applies?

 

What is primary protection?

Members who had a benefits value on 5 April 2006 (A-Day) of over £1.5 million could use primary protection to reduce or eliminate the chance that a lifetime allowance charge will apply. The amount of tax-free cash that they built up before A-Day is also protected. The tax-free cash is protected as a monetary amount if it exceeded £375,000 (25% of the lifetime allowance on A-Day). The amount payable after A-Day is the amount of tax-free cash available at 5 April 2006 indexed in line with increases to the lifetime allowance. From 6 April 2012, this increase factor is 1.2 (1.8/1.5), despite the lifetime allowance reducing to £1.5 million.

Primary protection had to be applied for by 6 April 2009.

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What is a primary protection factor?

It was possible for somebody to register their own personal lifetime allowance. This is expressed as a primary protection factor which is used to calculate the member's personal lifetime allowance when they take their pension benefits. Any amounts in excess of this will be subject to a lifetime allowance charge.

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How does primary protection affect tax-free cash?

If pre 6 April 2006 (A-Day) tax-free cash is less than £375,000 (25% of the lifetime allowance on 6 April 2006 then the amount payable will be the lesser of:

  • 25% of the benefits value when retirement benefits are taken, and
  • 25% of the lifetime allowance when retirement benefits are taken.

The tax-free cash will be protected as a monetary amount if it exceeded 25% of the lifetime allowance on A-Day. The amount payable will be the amount of tax-free cash available at 5 April 2006 indexed in line with increases to the lifetime allowance. From 6 April 2012, this increase factor is 1.2 (1.8/1.5), despite the lifetime allowance reducing to £1.5 million.

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Can contributions be paid from 6 April 2006 (A-Day), where primary protection applies?

Yes, but if the benefits value when retirement benefits are taken exceeds the personal lifetime allowance at that point, a lifetime allowance charge will apply.

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What happens if benefits are transferred and primary protection applies?

If benefits are transferred to another registered pension scheme and primary protection had been granted the protection remains.

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What happens to the maximum amount of tax-free cash that can be taken if contributions are paid from 6 April 2006 (A-Day) and primary protection applies?

If pre A-Day tax-free cash is less than 25% of the standard lifetime allowance on 5 April 2006 then the amount payable will be the lesser of:

  • 25% of the benefits value when retirement benefits are taken, and
  • 25% of the lifetime allowance when retirement benefits are taken.
The tax-free cash will be protected as a monetary amount if it exceeded 25% of the lifetime allowance on 5 April 2006. The amount payable will be the amount of tax-free cash available at 5 April 2006 indexed in line with increases to the lifetime allowance only, irrespective of any contributions paid from A-Day. From 6 April 2012, this increase factor is 1.2 (1.8/1.5), despite the lifetime allowance reducing to £1.5 million.

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What is enhanced protection?

If a member had pension rights before 6 April 2006 (A-Day), they could have applied for enhanced protection. There was no minimum benefits value but enhanced protection would only have made sense if the member thought their pension benefits might exceed the lifetime allowance. It gives full protection from the lifetime allowance charge when they come to take their benefits. Those with an entitlement to more than 25% of the lifetime allowance /benefits value as tax-free cash on 5 April 2006 will get the same percentage of their benefits value when the benefits are taken. Somebody applying for enhanced protection could also apply for primary protection if their benefits value exceeded £1.5 million on 5 April 2006. Anyone who selected enhanced protection must stop being an active member of all registered pension schemes (excluding any on-going contracted-out payments to a scheme that existed before A-Day) prior to A-Day. Anyone who does without advising HMRC will face a fine of up to £3000.

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In what circumstances will somebody with enhanced protection be treated as accruing further benefits?

The following table sets out the circumstances in which individuals will be treated as accruing further benefits:

Money Purchase

Type of benefit

Treated as accruing further benefits

Money purchase (other than cash balance) benefits

Any contribution paid by the employer, the member or someone on behalf of the member excluding any ongoing contracted-out rebates to a scheme that existed at 5 April 2006.


Defined Benefits and Cash Balance benefits

Unlike Money Purchase schemes where benefit accrual is based on contributions paid, Defined Benefit and Cash Balance accrual is checked when benefits are paid out or on transfer. Contributions to these types of scheme will not automatically trigger the loss of enhanced protection.

Type of benefit

Treated as accruing further benefits

Defined benefits

  • If the member's benefit increases by the greater of 5% and RPI between 6 April 2006 and the date benefits are taken.
  • If earnings increase by too much (see below).

Cash balance benefits

If the member's benefit increases by the greater of 5% and RPI between 6 April 2006 and the date benefits are taken.


Although members can only build up limited benefits under a defined benefit scheme or a cash balance arrangement on or after 6 April 2006 the eventual benefit paid will not be linked to earnings on 5 April 2006. Provided that earnings don't increase by too much the member will continue to benefit from salary growth (for as long as they remain in the employer's service) while protecting all of their benefits from the lifetime allowance charge.

Pre 6 April 2006 tax regime

Maximum earnings increase

Pre 1987 member
and
1987- 1989 member (Non-capped)

The lower of

  • the best salary in any one 12 month period in the last 3 years before benefits are taken (or leaving service if earlier) if this is lower than 7.5% of either £1.8 million or the LA, if higher, at that point, and
  • earnings averaged over the 3 years before benefits are taken (or leaving service if earlier).

Post 1989 member
(Capped)

The lower of

  • 7.5% of either £1.8 million or the LA, if higher, when benefits are taken, or
  • the best salary in any one 12 month period in the last 3 years before benefits are taken (or leaving service if earlier)



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How will enhanced protection affect tax-free cash?

If less than 25% of the benefits value was available as tax-free cash at 5 April 2006 then the maximum tax-free cash available will be the lesser of:

  • 25% of the benefits value when retirement benefits are taken, and
  • 25% of the standard lifetime allowance when retirement benefits are taken.


If the member is entitled to more than 25% of the standard lifetime allowance/benefits value when they take their retirement benefits, this will be protected at A-Day as a percentage of the benefits value. The tax-free cash when the benefits are taken will be based on the same percentage of the benefits value as it was on 5 April 2006.

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Can the benefits be transferred where enhanced protection applies?

If benefits are transferred to another registered pension scheme and protection has been granted the protection will remain.

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If somebody had an entitlement to more than 25% tax-free cash on A-Day and didnít apply for primary and/or enhanced protection, how much of a tax-free cash sum can they take at when retirement benefits are taken?

Members who didnít opt for transitional protection but who had the right to more than 25% of their benefits value at 5 April 2006 as tax-free cash will still be able to have the higher percentage paid when they take their retirement benefits. If somebody was entitled to more than 25% tax-free cash post A-Day they didnít have to register this unless they were also applying for primary or enhanced protection. They can still get the higher tax-free cash amount based on the amount of tax-free cash at 5 April 2006 increased in line with the increases to the lifetime allowance, up to the date they take their retirement benefits. From 6 April 2012, this increase factor is 1.2 (1.8/1.5), despite the lifetime allowance reducing to £1.5 million.

If benefits are transferred to another registered pension scheme after A-Day and protection had been granted the protection would remain. However, the same would not apply to somebody with a tax-free cash entitlement of more than 25% who had not applied for primary or enhanced protection. These people will lose their entitlement to the higher amount of tax-free cash under the new plan, unless their transfer can be classed as a 'block transfer' or in certain circumstances where a scheme winds up.

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What happens when somebody transfers their plan and they were entitled to more than 25% tax-free cash pre 6 April 2006 (A-Day)?

If benefits are transferred to another registered pension scheme and protection has been granted the protection will remain. However, the same will not apply to somebody with a tax-free cash entitlement of more than 25% if they had not applied for primary or enhanced protection. These people will lose their entitlement to the higher amount of tax-free cash under the new plan, unless their transfer can be classed as a 'block transfer' or in certain circumstances where a scheme winds up.

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What is fixed protection?

A member who registers for fixed protection will keep a lifetime allowance of £1.8 million after 6 April 2012 (when the lifetime allowance reduced to £1.5 million).

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Could anybody apply for fixed protection?

Anyone who did not have either primary protection or enhanced protection could apply for fixed protection. They do not need to have already built up pension savings of more than £1.5 million to apply but anyone who opted for fixed protection must have stopped being an active member of all registered pension schemes prior to 6 April 2012.

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Can a member apply for fixed protection at any time?

No, anybody opting for fixed protection had to apply before 6 April 2012.

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Can a member lose fixed protection?

Yes, to keep fixed protection a member:

  • canít start a new arrangement other than to accept a transfer of existing pension rights;
  • canít have benefit accrual;
  • will be subject to restrictions on where and how they can transfer benefits.


If the member breaks one of these conditions fixed protection is lost. The member must tell HMRC if fixed protection is lost.

The following table sets out what Ďbenefit accrualí means.

Type of benefit

Value of benefit

Money Purchase (other than Cash Balance) benefits

This includes all member contributions, employer contributions and contributions paid by other people on the memberís behalf.

Defined Benefits and cash Balance benefits

  • For defined benefits or cash balance arrangements benefit accrual will occur if in any tax year from 2012-13 onwards, the value of the pension rights over the tax year have gone up by more than the 'relevant percentage', which is:
    • An annual rate used to increase benefits and which was specified in the scheme's rules on 9 December 2010.
    • If no rate is specified, the percentage by which the consumer prices index (CPI) increased in the year ending in September of the previous tax year. If there is no increase or a fall in the CPI in this period, then the percentage rate is nil.


    Defined benefits schemes normally specify a percentage rate by which deferred benefits will increase each year until the time when the member takes their benefits. For an active member, benefits will normally increase in value by reference to years of service and pensionable salary rather than by a percentage rate. So the relevant percentage for an active member of a defined benefits scheme will be the increase in CPI



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Can the benefits be transferred where fixed protection applies?

To keep fixed protection, pension rights from a money purchase arrangement can only be transferred to another money purchase arrangement which is a registered pension scheme.

Pension rights from a cash balance arrangement or defined benefits arrangement can be transferred to:

  • a money purchase arrangement under a registered pension scheme
  • another cash balance arrangement if the transfer is made because:
    • the pension scheme making the transfer is winding up or
    • the employer has sold all or part of their business and the benefits are being transferred to the new employer's scheme

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