Primary/Enhanced and Fixed Protection

INTRODUCTION TO PRIMARY, ENHANCED AND FIXED PROTECTION

Enhanced protection, primary protection and fixed protection was introduced to protect pension savings prior to the introduction of the lifetime allowance (LTA) and the reduction in the Lifetime allowance from 6 April 2012.

WHAT IS PRIMARY PROTECTION?

Under HMRC rules, if the value of your pension benefits at 5 April 2006 was more than the 2006/2007 lifetime allowance of £1.5million and you registered for primary protection, you will have an individual lifetime allowance based on how much your benefits at 5 April 2006 exceeded the value of the 2006/2007 standard lifetime allowance. Primary protection had to be applied for by 5 April 2009
Your personal lifetime allowance increases at the same rate as the standard lifetime allowance.

HOW IS THE PERSONAL LIFETIME ALLOWANCE CALCULATED?

There are two approaches that can be taken when calculating the personal lifetime allowance. One method is to take the value of the retirement funds as at 5 April 2006 and increase in line with the percentage increase in the lifetime allowance between 6 April 2006 and the date you want to withdraw retirement funds.

An alternative approach is to calculate the primary protection factor.

Please note the following example:

Primary protection has a personal lifetime allowance. This is calculated by a Lifetime Allowance Enhancement Factor that is added to the standard lifetime allowance. As such, the 'protected' or registered retirement fund value is automatically indexed in line with the lifetime allowance

The Lifetime Allowance Enhancement Factor is calculated as follows:

(Value of pension rights at 5 April 2006 - £1.5m) ÷ £1.5m

Example: (£1.7m - £1.5m) ÷ £1.5m = 0.13

Therefore 0.13 is the lifetime allowance enhancement factor that will be used in the calculation

  • The personal lifetime allowance then applies upon the date you wish to withdraw retirement benefits. This is calculated by applying the lifetime allowance enhancement factor to the underpinned lifetime allowance applicable at the retirement date and adding that to the underpinned lifetime allowance.

The formula to calculate the Personal Lifetime Allowance at the stated retirement date is as follows:

  • Standard Lifetime Allowance + (standard lifetime allowance x lifetime allowance enhancement factor)
  • Retirement date: 20/08/2012
  • Underpinned lifetime allowance at retirement date: £1. 8m
  • Lifetime allowance enhancement factor: 0.13
  • Personal Lifetime Allowance at retirement date: 1. 8 + (1.8 x 0.3) = £2,034,000

Therefore, retirement benefits up to £2,034,000 can be taken before incurring any Lifetime Allowance Charge.

Unlike Enhanced Protection, those with primary protection can suffer a lifetime allowance tax charge. This would apply to any benefits that are taken in excess of the personal lifetime allowance.

With primary protection, the amount of protection has increased with the normal lifetime allowance.

However, when the lifetime allowance decreased to £1.5 million on 6 April 2012, individuals with primary protection will retain the protected amount. This is detailed in paragraph 2, Sch 18 (3) of the Finance Act 2011, which states the underpinned lifetime allowance is the greater of the current standard lifetime allowance and £1,800,000 (the standard lifetime allowance for the tax year 2011-12).

WHAT IS ENHANCED PROTECTION?

If you had pension rights before 6 April 2006, you could have applied for enhanced protection.

There was no minimum retirement benefit value but enhanced protection would have been suitable if you thought your pension benefits might exceed the lifetime allowance.

Enhanced protection gives full protection from the lifetime allowance charge when you come to take retirement benefits.

If you had an entitlement of more than 25% of the lifetime allowance /benefits value as tax-free cash on 5 April 2006 you will get the same percentage of retirement benefits when you retire.

If you selected enhanced protection you had to stop being an active member of all registered pension schemes (excluding any on-going contracted-out payments to a scheme that existed before 6 April 2006) prior to 6 April 2006. Anyone who doesn’t stop without advising HMRC will face a fine of up to £3000 unless they are informed you wish to revoke the protection.

Enhanced protection had to be applied for by 5 April 2009.

HOW DOES ENHANCED PROTECTION WORK FOR DEFINED BENEFIT SCHEMES?

Unlike defined contribution schemes where benefit accrual is based on contributions paid, defined benefit and cash balance accrual are checked when benefits are paid out or on transfer. Contributions to these types of scheme will not automatically trigger the loss of enhanced protection.

WHAT HAPPENS TO DEATH BENEFITS WHEN I HAVE PRIMARY AND ENHANCED PROTECTION?

The protection rules are similar for both protection types. The protection is based on the expected lump sum death benefit as at 5 April 2006.

The following link to the HMRC website www.hmrc.gov.uk/manuals/.../rpsm03109100flowchart.doc details what will happen on death.

WHAT IS FIXED PROTECTION?

If someone registered for fixed protection they will keep a lifetime allowance of £1.8 million after 6 April 2012 (when the lifetime allowance reduced to £1.5 million).
The deadline to register for fixed protection was 5 April 2012

If you did not have either primary protection or enhanced protection you could apply for fixed protection.

You did not need to build 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. You can however transfer existing pension’s rights into your retirement fund.

If you no longer qualify for fixed protection you must advise HMRC within 90 days or face a fine of up to £3000.

WHAT IS PROTECTED TAX FREE CASH?

This protection falls into three different categories:

  • Tax Free Cash rights were less than £375,000 at 5 April 2006, even though the tax free cash entitlement exceeded 25% of the uncrystallised rights at 5 April 2006
  • Primary protection is in force and the tax free cash entitlement exceeded £375,000 at 5 April 2006
  • Enhanced protection is in force and the tax free cash entitlement exceeded £375,000 at 5 April 2006

WHAT IS A STANDALONE LUMP SUM?

A standalone lump sum was available when an occupational scheme member’s entitlement to tax free cash as at 5 April 2006 was equal to the fund value of that arrangement.

A standalone lump sum can only be paid if there have not been any accruals under the scheme since 6 April 2006. The member must also not have lump sum primary or enhanced protection.

The amount of the standalone lump sum paid will be the current value of the arrangement.

The following HMRC links www.hmrc.gov.uk/manuals/rpsmmanual/rpsm03105640.htm www.hmrc.gov.uk/manuals/rpsmmanual/rpsm03105515.htm give an insight into the rules and regulations.

HOW DID YOU CLAIM FOR PROTECTION?

The deadline to register for primary and enhanced protection was 6 April 2009. The deadline to submit an application for fixed protection was 5 April 2012.

Form APSS 200 had to be completed for either primary or enhanced protection. Once agreed by HMRC a certificate was issued to individuals. This certificate must be kept in a safe place and can only be disregarded once all retirement benefits have been taken.

In order to claim for fixed protection an application form had to be completed. Once agreed by HMRC a certificate was also issued.

WHAT IF I DIVORCE AND MY PROTECTED RETIREMENT FUND REDUCES?

If you applied for primary or enhanced protection and later divorce you must contact HMRC advising them of the impact to your retirement fund. HMRC will then issue a revised certificate.