Pension protection - frequently asked questions

Primary protection

A: Members who had a benefits value on 5 April 2006 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 6 April 2006 can also be protected. The tax-free cash is protected as a monetary amount if it exceeded £375,000 (25% of the lifetime allowance on 6 April 2006). The amount payable after 6 April 2006 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 current lifetime allowance being £1,030,000 (2018/19).

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

A: 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.

A: If pre 6 April 2006 (A-Day) tax-free cash was 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 £1.5 million (£375,000).

The tax-free cash is protected as a monetary amount if it exceeded 25% of the lifetime allowance on 6 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. From 6 April 2012, this increase factor is 1.2 (1.8/1.5), despite the lifetime allowance being £1,055,000 (2019/20).

A: 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.

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

Enhanced protection

A: 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 who had 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 have applied for primary protection if their benefits value exceeded £1.5 million on 5 April 2006. Anyone who selected enhanced protection 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 does without advising HMRC will face a fine of up to £3,000.

A: The following table sets out the circumstances in which members are treated as accruing further benefits:

Money purchase

Type of benefitTreated 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, under defined benefits it's based on the increase in benefits payable.  For 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 benefitTreated 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 regimeMaximum 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, or
  • 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).

A: 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 £1.5 million (£375,000).

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 as at 5 April 2006 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.

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

Scheme specific tax-free cash protection

A: Members who didn't 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 6 April 2006 they didn't 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 current lifetime allowance being £1,055,000 (2019/20).

A: 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.

Fixed protection

Fixed protection 2012

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

Fixed protection 2014
A member who registers for fixed protection 2014 will keep a lifetime allowance of £1.5 million after 6 April 2014 (when the lifetime allowance reduced to £1.25 million).

Fixed protection 2016
A member who registers for fixed protection 2016 will keep a lifetime allowance of £1.25 million after 6 April 2016 (when the lifetime allowance reduced to £1 million).

A:
Fixed protection 2012
Anyone who did not have either primary protection or enhanced protection could have applied for fixed protection 2012. They did 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.

Fixed protection 2014
Anyone who did not have either primary protection, enhanced protection or fixed protection 2012 could have applied for fixed protection 2014. They did not need to have already built up pension savings of more than £1.25 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 2014.

Fixed protection 2016
Anyone who does not have either primary protection, enhanced protection, fixed protection 2012 or fixed protection 2014 can apply for fixed protection 2016. They do not need to have already built up pension savings of more than £1 million to apply but anyone who opts for fixed protection must have stopped being an active member of all registered pension schemes prior to 6 April 2016.

A:
Fixed protection 2012

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

Fixed protection 2014
No, anybody opting for fixed protection 2014 had to apply before 6 April 2014.

Fixed protection 2016
Unlike fixed protections 2012 and 2014 there is no application deadline for fixed protection 2016. 

Anyone applying for fixed protection 2016 had to stopped being an active member of all registered pension schemes prior to 6 April 2016.

Anyone who wishes to apply for lifetime allowance protection has to do so online. 

The individual will need an HMRC Online Services Account, if they do not already have one they will have to create an account. If the individual had applied previously using the interim paper process (before 31 July 2016) details of their lifetime allowance protections will already be held on their online account.

HMRC services: sign in or register.  

Individuals will not receive paper certificates with their lifetime allowance protection details. 

A: Yes, to keep fixed protection a member:

  • can't start a new arrangement other than to accept a transfer of existing pension rights;

  • can't 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 'benefit accrual' means:

Type of benefitBenefit accrual
Defined benefits and cash balance benefits For defined benefits or cash balance arrangements benefit accrual will occur if in any tax year from:

2012-2013 onwards for fixed protection 2012
2014-2015 onwards for fixed protection 2014
2016-2017 onwards for fixed protection 2016

where 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 for FP 2012, or
    - on 11 December 2012 for FP 2014, or
    - on 9 December 2015 for FP 2016, or
    - the highest percentage so specified for an arrangement where there is more than one arrangement and they have different annual rates plus the relevant statutory increase percentage.
  • For FP 2012 only, an annual rate specified by reference to the retail prices index (RPI) which is used to increase the member’s rights and was specified in the rules of a pension scheme (or a predecessor registered pension scheme) on 6 April 2012 and which does not exceed the RPI increase (or the highest percentage so specified for an arrangement where there is more than one arrangement and they have different annual rates) plus the relevant statutory increase percentage.
  • (If no annual rate was specified) the higher of:
    - the relevant statutory percentage increase, and
    - the percentage by which the consumer prices index (CPI) for the month of September in the previous tax year is higher than it was for the same month in the year before (or nil if there had been no increase or a fall).
  • An increase in the RPI means the percentage by which the RPI for a month specified in the rules of the pension scheme (or predecessor pension scheme) is higher than it was for the same month in the year before (or nil per cent if it is not higher).
  • 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.
  • For FP 2012 only, if both the first two bullet points apply and give different percentages, the relevant percentage is the higher percentage.
Money purchase (other than cash balance) benefits This includes all member contributions, employer contributions and contributions paid by other people on the member's behalf.

A: 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

Individual protection

A:
Individual protection 2014
Gives members who thought the value of their benefits would be over the lifetime allowance when they come to take their benefits, a personalised lifetime allowance based on the value of their pension savings at 5 April 2014 (up to a maximum of £1.5 million). It allowed members whose pension rights were valued at over £1.25 million on 5 April 2014 to protect those rights, subject to an overall maximum of £1.5 million. A crucial difference from fixed protection is that they will still be able to be an active member of a pension scheme. Members were able to apply for individual protection 2014 up to 5 April 2017.

It was possible to apply for individual protection 2014 if the member already had fixed protection 2014.

Individual protection 2016
Will give members who think the value of their benefits will be over the lifetime allowance when they come to take their benefits, a personalised lifetime allowance based on the value of their pension savings at 5 April 2016 (up to a maximum of £1.25 million). It allows members whose pension rights were valued at over £1 million at 6 April 2016 (the lifetime allowance from 6 April 2016) to protect those rights, subject to an overall maximum of £1.25 million.

There is no time limit for applying for individual protection 2016.

As with individual protection 2014, a crucial difference from fixed protection 2016 is they can still be an active member of a pension scheme. It is possible to apply for individual protection 2016 if the member already has fixed protection.

A: Yes, it is possible to apply for individual protection 2016 if the member already has fixed protection 2016.

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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Last updated: 05 Apr 2019

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.