Primary and enhanced protection

It was possible to protect pension benefits built up before 6 April 2006 (A-Day) from a lifetime allowance charge by applying for primary and enhanced protection.

It was possible for members of pension schemes set up before 6 April 2006 to protect the benefits that they already had on 5 April 2006. There are 2 types of protection - primary protection and enhanced protection. Members had until 5 April 2009 to apply for primary or enhanced protection.

Primary protection - Members who had benefit values at 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 had already built up before 6 April 2006 could also be protected.

Enhanced protection - This can also protect the tax-free cash that was built up before 6 April 2006 and completely eliminate the risk of a lifetime allowance charge being due (as long as certain criteria are met).

Enhanced protection couldn't be sought for members with benefits over the pre 6 April 2006 HM Revenue and Customs (HMRC) maxima. If there was a surplus on 5 April 2006 this had to be dealt with before the member could apply for enhanced protection. Primary protection could be applied for even if the limits were exceeded, but it was not possible to protect more than the HMRC maximum limit. The HMRC limit became the protected amount if the benefits were more than this limit on 5 April 2006.

The different types of protection are explained in more detail below:

Primary Protection

This can be used by members who had a benefits value on 5 April 2006 which exceeded the LA of £1.5 million. These members could register their own personal lifetime allowance (PLA). This is expressed as a primary protection factor which will be used to calculate the member's PLA when benefits are taken. Any amounts in excess of this will be subject to a lifetime allowance charge.

Due to the reduction in the lifetime allowance, from 6 April 2012, the LA allowance used to calculate the level of PLA remains £1.8m until such time as the LA is greater than £1.8m.

Tax-Free Cash Lump Sum (TFC) - If pre 6 April 2006 TFC was less than £375,000 (25% of the LA on 6 April 2006) then the amount payable will be the lesser of 25% of the benefit value and 25% of £1.5 million, prior to 6 April 2014 it would have been 25% of the LA when benefits were taken.

The TFC will be protected as a monetary amount if it exceeded 25% of the LA on 5 April 2006. From 6 April 2012 the amount payable will be the amount of TFC available at 5 April 2006 increased by 20% until such time as the LA is greater than £1.8 million when it will be indexed in line with increases to the LA.

Example 1 - Primary protection - TFC less than 25% of LA at 5 April 2006
Benefits value at 5 April 2006 = £2.25 million

Primary protection factor is therefore = £2.25m - £1.5m = £0.75m/£1.5m = 0.5 

Benefits value in May 2019 = £2.65 million

LA in tax year 2019/20 = £1,055,000 

Primary protection maintains the LA at £1.8 million.

PLA when benefits are taken = £1.8 million + (£1.8 million x 0.5) = £2.7 million

TFC
TFC at 5 April 2006 = £210,000 (i.e. primary protection does not apply to TFC as it was less than £375,000)

Maximum TFC when benefits are taken will be the lower of:
- 25% x £1.5 million = £375,000 and

- 25% of £2.65 million = £662,500

The maximum TFC is therefore £375,000.

The member's benefits value exceeds the LA in the year in which they take their benefits. But, as they opted for primary protection, a PLA applies. The member's PLA is greater than benefits value when they are taken so no lifetime allowance charge is due.

Example 2 - TFC more than 25% of LA at 5 April 2006
Benefits value at 5 April 2006 = £4.5 million

Primary protection factor is therefore = £4.5m - £1.5m = £3m/£1.5m = 2

Benefits value in July 2019 = £5.3 million

LA in tax year 2019/20 = £1,055,000 

Primary protection maintains the LA at £1.8 million.

PLA at vesting = £1.8 million + (£1.8 million x 2) = £5.4 million

TFC
TFC at 5 April 2006 = £840,000

Maximum TFC at vesting will be: £840,000 x 120% = £1,008,000

Again, no lifetime allowance charge is due as PLA exceeds benefits value when they are taken.

Enhanced Protection

This applies to members who wanted full protection from the lifetime allowance charge when they come to take their benefits. Enhanced protection allows the pension fund to grow to any amount without it being subject to the lifetime allowance.

Anyone who selected enhanced protection had to stop paying into any money purchase scheme (excluding any on-going contracted-out payments to an existing scheme) prior to 6 April 2006. Members of defined benefit schemes or cash balance arrangement can only build up limited benefits in a registered pension scheme on or after 6 April 2006. Anyone who breaks these conditions, without advising HM Revenue and Customs, can face a financial penalty.

There was no minimum benefits value to register for enhanced protection. A member who applied for enhanced protection could also apply for primary protection if their benefits value exceeded £1.5 million on 5 April 2006.

Tax Free Cash

Tax free cash can also be protected via enhanced protection.

A member with an entitlement to TFC of more than 25% of the lifetime allowance (£375,000) and more than 25% of the fund on 6 April 2006 could protect their benefits so that when they come to take their benefits their TFC will be based on the same percentage of their benefits value at crystallisation as it was on 5 April 2006.

A member with an entitlement to TFC of more than 25% of their benefits value on 6 April 2006 but less than 25% of the lifetime allowance on 6 April 2006 (£375,000) cannot protect the TFC amount using enhanced protection. However, scheme specific tax free cash  protection may apply.

Example 1
Thomas had benefits of £1,300,000 at 5 April 2006. His TFC entitlement was £400,000 (31%). As his TFC at 5 April 2006 was greater than 25% of the LTA (£375,000) at that point enhanced protection of his TFC applies. When he takes his benefits in 2019/20 his benefits are worth £1,950,000 and he is entitled to 31% TFC, being £604,500.

Example 2
Grant had benefits of £1,400,000 at 5 April 2006. His TFC entitlement was £280,000 (20%). As his TFC at 5 April 2006 was less than 25% of the LTA (£375,000) at that point he does not have enhanced protection for his TFC entitlement. When he takes his benefits in 2019/20 his benefits are worth £2,000,000 and he is entitled to an amount of TFC, of the lower of:

  • £500,000 being 25% of £2,000,000
  • £375,000 being 25% of £1,500,000

Grant would be entitled to TFC of £375,000.

The following tables set out the circumstances in which members are treated as accruing further benefits in which case enhanced protection would be lost:

PTM092430: protecting pre April 2006 pension benefits: relevant benefit accrual

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, 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 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, 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)

A summary of the 2 different types of protection:

PrimaryEnhanced

The member's benefits value on 5 April 2006 had to exceed £1.5 million.

The member could protect any amount with no possibility of a lifetime allowance charge.

Can make future contributions.

All contributions to money purchase schemes had to cease before 6 April 2006 and there can only be limited accrual under defined benefit/cash balance schemes from 6 April 2006, the only exception being any contracted-out rebates to a scheme that existed at 5 April 2006.

Benefits value on 5 April 2006 is expressed as a factor which is used to calculate the member's PLA.

The PLA will be increased by 20% until the LA is greater than £1.8 million when it will be indexed in line with increases to the LA.

Unlimited fund growth protected for money purchase schemes (but no further contributions). Limited accrual protected for defined benefit/cash balance schemes.

May attract a lifetime allowance charge on excess above PLA.

May revert to primary protection if enhanced protection lost (if registered for primary protection as well).

No protection

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 TFC are able to have a protected amount of TFC paid when they take their benefits and depending on fund growth additional TFC based on post 6 April 2006 benefits. Details of how this works can be found in our article Protection of scheme specific tax-free cash.

Lifetime allowance charge

Details of how the lifetime allowance charge is calculated can be found in our lifetime allowance charge article.

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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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.