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RPSM11101500 - Technical Pages: Lifetime allowance: Level of lifetime allowance: Fixed protection

Fixed protection for pension savings

[Para 14 Sch 18 FA 2011] 

On 6 April 2012 the lifetime allowance was reduced to £1.5 million from the level of £1.8 million in 2011-12. As members may have already built up savings of more than £1.5 million or have planned to do so in the expectation that the lifetime allowance would not reduce from the 2011-12 level, there is a new form of protection called “fixed protection”.

If a member expects their pension savings might be more than £1.5 million (including taking into account past crystallisations) when they come to take their benefits on or after 6 April 2012 they can use fixed protection to help reduce or mitigate the lifetime allowance charge. Fixed protection allows individuals to crystallise benefits worth up to £1.8 million without paying the lifetime allowance charge, although the ability to accrue future benefits is limited.

What is a member’s lifetime allowance if they successfully applied for fixed protection?
Who could apply for fixed protection?
What are the conditions for fixed protection?
Applying for fixed protection
How does the reduced annual allowance affect the lifetime allowance?
How does the scheme pays process for an annual allowance charge affect the lifetime allowance?
Paying benefits to someone with fixed protection

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What is a member’s lifetime allowance if they successfully applied for fixed protection?

If someone has fixed protection their lifetime allowance will be fixed at £1.8 million rather than the standard lifetime allowance, which will be £1.5 million from 6 April 2012.

If, in the future, the standard lifetime allowance rises to be more than £1.8 million the member’s fixed protection will stop. Their lifetime allowance will then be the higher standard lifetime allowance.

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Who could apply for fixed protection?

Anyone who did not have either primary protection or enhanced protection could apply for fixed protection. They did not need to have already built up pension savings of more than £1.5 million to apply. If someone wanted to apply for fixed protection then they had to meet certain conditions. These are that on 6 April 2012 they

Once a member has fixed protection there are restrictions on what they will be able to do with their benefits. For example, they will normally need to stop building up benefits under every registered pension scheme that they belong to by 5 April 2012. It is important that the member gives their scheme administrator (or employer) enough notice if they want to stop their active membership.

If a member left this notification to the last minute then their accrual or contributions may not have ceased before 6 April 2012 and if this is the case then they will not be able to rely on fixed protection. As a result their lifetime allowance will be the standard lifetime allowance of £1.5 million, and if their benefits are worth more than this when they take them they will be liable to a lifetime allowance charge.

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What are the conditions for fixed protection?

To keep fixed protection a member

  • cannot start a new arrangement under a registered pension scheme other than to accept a transfer of existing pension rights,
  • cannot have benefit accrual, and
  • will be subject to restrictions on where and how they can transfer benefits.

If the member breaks one of these conditions then they will lose their fixed protection. A member must tell HMRC if they lose fixed protection. RPSM11101520 gives more information on how and when an individual can lose fixed protection.

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Applying for fixed protection

A member could only apply for fixed protection before 6 April 2012. Applications received after 5 April 2012 will not be accepted. The fixed protection legislation does not (unlike that for enhanced and primary protection) allow HMRC to accept late applications.

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How does the reduced annual allowance affect the lifetime allowance?

It is possible that the changes to the annual allowance may mean that a member becomes liable to an annual allowance charge in the same year that their benefits are tested against the lifetime allowance. If the member is liable for an annual allowance charge in the year that they exceed the lifetime allowance, they will still need to pay the lifetime allowance charge if their total benefits are more than their lifetime allowance. There will be no reduction in the amount of lifetime allowance charge due because the member is also liable to the annual allowance charge. See RPSM06105000 for more information about the annual allowance after 5 April 2011.

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How does the scheme pays process for an annual allowance charge affect the lifetime allowance?

RPSM06109030 contains guidance on how the circumstances in which scheme pays can operate. Under scheme pays the annual allowance tax charge is met by a reduction in the member’s pension benefits, unless the member elects to settle the charge directly with HMRC, and the scheme administrator makes a consequential adjustment to the member’s pension savings or their benefit entitlement under the scheme. This means that when the member comes to take their benefits, it is the reduced rate of pension payable that is tested against the lifetime allowance not the rate of pension before the reduction.

Example

Paul is entitled to a scheme pension under his registered pension scheme. He uses scheme pays to meet an annual allowance charge and the scheme administrator makes a consequential adjustment to Paul’s scheme pension entitlement. When Paul takes his pension the adjustment means the rate of pension he is entitled to is reduced from £45,000 per annum to £43,000. When Paul takes his pension there is a BCE 2 (see RPSM11104200 for more detail). The amount crystallised by the BCE 2 is £860,000 (£43,000 x 20) and not £900,000 (£45,000 x 20).

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Paying benefits to someone with fixed protection

If a member has fixed protection and wants to rely on it to reduce or eliminate a lifetime allowance charge when they take benefits, they must tell their scheme administrator that they have fixed protection.

Even where the member does not want to crystallise benefits in excess of the standard lifetime allowance they should tell the scheme administrator they have fixed protection. This will enable the scheme administrator to calculate the percentage used of the lifetime allowance based on £1.8 million.

The member must give their scheme administrator the fixed protection certificate reference number; this is the legal minimum requirement. The scheme administrator may ask to see a copy of the fixed protection certificate.

Where a member has received a fixed protection certificate, but before they take all of their benefits

  • they have benefit accrual
  • they start a new arrangement other than to accept a transfer of existing pension rights
  • there is an impermissible transfer into an arrangement or
  • a transfer is made that is not a permitted transfer

then they will lose fixed protection from the date the event above occurred and can no longer rely on the fixed protection certificate that was issued to them. A member must tell HMRC if they lose fixed protection.

When a scheme administrator starts to pay benefits to a member they need to satisfy themselves that there is no lifetime allowance charge due. If the lifetime allowance charge is due the scheme administrator needs to know how much is due. The scheme administrator is jointly and severally liable to the lifetime allowance charge where the event triggering the lifetime allowance test is not the payment of a death benefit. The scheme administrator also has to report liability to the lifetime allowance charge on the accounting for tax (AFT) return.

Unless a scheme administrator is told otherwise they must proceed on the basis that the member has no form of protection from the lifetime allowance charge.

When a scheme administrator is given details of a member’s fixed protection they proceed on the basis that the member has a standard lifetime allowance of £1.8 million. This means that

  • as long as the member’s total benefits are not worth more than £1.8 million there is no lifetime allowance charge
  • if the member does not have scheme specific lump sum protection (see RPSM03105500) their maximum pension commencement lump sum will be the lower of
    • 25% of the available lifetime allowance set by fixed protection which will be £1.8 million
    • 25% of the amount crystallising under the scheme at that time.

This means that if a member has not previously taken any benefits and is crystallising £1.8 million or more their maximum pension commencement lump sum will be £450,000.

If using fixed protection means that the member has

  • no lifetime allowance charge (but would have done if they had no fixed protection), or
  • a smaller amount liable to the lifetime allowance charge

the scheme administrator must tell HMRC that the member has used fixed protection on the event report. This is a ‘reportable event 6’. RPSM12301070 explains what needs to be reported to HMRC.

Any liability to the lifetime allowance charge must be reported on the AFT return and paid at the same time. Guidance on reporting and paying the lifetime allowance charge can be found from RPSM12301300.

After crystallising benefits the scheme administrator must give the member a statement showing how much of the standard lifetime allowance has been used up by the benefit crystallisation. The percentage shown on the certificate should be calculated as a percentage of the member’s standard lifetime allowance, i.e. the underpinned lifetime allowance of £1.8 million from 6 April 2012.

Example

Phillippa crystallises £750,000 in 2006-07. This uses up 50% of the standard lifetime allowance. Phillippa is sent a certificate each year showing she has used up 50% of the SLA.

Phillippa applies for fixed protection.

In August 2012, Phillippa decides to take £600,000 benefits. As Phillippa has fixed protection her standard lifetime allowance is £1.8 million.

The benefits crystallised use up 33.33% of her standard lifetime allowance at the time. Phillippa‘s scheme gives Phillippa a certificate showing she has used up 33.33% of the standard lifetime allowance.

Phillippa’s available LTA before this latest BCE is calculated as

£1.8 million - (£750,000 x £1.8/1.5) = £900,000.

After taking benefit Phillippa will have £300,000 remaining LTA. That is 16.67% left.

In May 2013, Phillippa starts to contribute to an other money purchase scheme and loses her fixed protection. Her standard lifetime allowance reverts to £1.5 million for the future.

Third benefit crystallisation event - August 2014. Assuming an SLA of 1.5 million Phillippa’s available LTA is now

£1.5 million - (£750,000 x 1.5/1.5 + £600,000 x 1.5/1.8) = £250,000

This is 16.67% of Phillippa s SLA.

Phillippa has BCE certificates adding up to 83.33%. So the scheme can see from Phillippa’s existing BCE certificates that she only has 16.67% SLA left.


  Glossary (RPSM20000000)