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HMRC internal manual

Pensions Tax Manual

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Protection from the lifetime allowance charge: essential principles

Glossary PTM000001
   

 

Overview
Types of protection
More than one type of protection
Relying on protection
Reporting requirements
Pension sharing - impact on protections
Pension credits and lifetime allowance enhancements
Pension debits and primary protection, individual protection 2014 and individual protection 2016
Pension credit rights/pension debits and enhanced protection or any type of fixed protection

Overview

The level of the standard lifetime allowance has changed over the years and the table at PTM081000 sets out the level of the lifetime allowance for tax years 2006-07 onwards.  Since the lifetime allowance was introduced a number of measures have been made available that enable members to take pension benefits of more than the standard lifetime allowance and either pay no lifetime allowance charge or have a reduced charge. These measures are known as lifetime allowance protections

Types of protection

There are a number of different forms of lifetime allowance protections which might apply, which are set out below.

Primary protection (PP)

Primary protection is for individuals who had pension savings of over £1.5 million on 5 April 2006. Individuals gain a personal lifetime allowance greater than the standard lifetime allowance in place when benefits are taken. Primary protection cannot be given up and can only be reduced or lost through pension sharing on divorce.

See PTM092300 for further detail on primary protection.

Enhanced protection (EP)

EP means an individual will not be liable to a lifetime allowance charge regardless of the value of their pension rights. Individuals with EP have only very limited opportunity to accrue further pension benefits and will lose their EP in a number of circumstances.

See PTM092400 for further detail on EP.

Fixed protection (FP 2012)

FP 2012 fixes an individual’s lifetime allowance at £1.8 million so benefits up to that amount can be taken without a charge. Individuals with FP 2012 have only very limited opportunity to accrue further pension benefits and will lose their FP 2012 in a number of circumstances.

See PTM093000 for further details on FP 2012.

Fixed protection 2014 (FP 2014)

FP 2014 fixes an individual’s lifetime allowance at £1.5 million so benefits up to that amount can be taken without a charge. Individuals with FP 2014 have only very limited opportunity to accrue further pension benefits and will lose their FP 2014 in a number of circumstances.

See PTM093000 for further details on FP 2014.

Fixed protection 2016 (FP 2016)

FP 2016 fixes an individual’s lifetime allowance at £1.25 million so benefits up to that amount can be taken without a charge. Individuals with FP 2016 have only very limited opportunity to accrue further pension benefits and will lose their FP 2016 in a number of circumstances.

See PTM093000 for further details on FP 2016.

Individual protection 2014 (IP 2014)

IP 2014 offers more flexibility than FP 2014 because it does not restrict future pension savings. Individuals who had pension savings of more than £1.25 million at 5 April 2014 gain a personalised lifetime allowance equal to the value of their pension savings on 5 April 2014 up to a maximum of £1.5 million.

See PTM094000 for further details on IP 2014.

Individual protection 2016 (IP 2016)

IP 2016 offers more flexibility than FP 2016 because it does not restrict future pension savings. Individuals who had pension savings of more than £1 million at 5 April 2016 gain a personalised lifetime allowance equal to the value of their pension savings on 5 April 2016 up to a maximum of £1.25 million.

See PTM094000 for further details on IP 2016.

Divorce and international

Lifetime allowance protections or enhancements may also be available on divorce where pension credit rights are acquired and in some international non-residence situations or on transfers from recognised overseas pension schemes to UK registered pension schemes.

See PTM092200 for further details of the effects of pension sharing on divorce on the individual’s lifetime allowance and for further details on lifetime allowance enhancements for international situations.

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More than one type of protection

It is possible, in some cases, for a member to have more than one type of protection and the table below shows the possible combinations:

  PP EP FP 2012 FP 2014 IP 2014 FP 2016 IP 2016
               
PP   Yes No No No No No
EP Yes   No No Yes No No
FP 2012 No No   No Yes No No
FP 2014 No No No   Yes No No
IP 2014 No Yes Yes Yes   Yes No
FP 2016 No No No No Yes   Yes
IP 2016 No Yes Yes Yes No Yes  

For FP 2016 and IP 2016 an application may be successful on a dormant basis because the member has a valid earlier protection.  So in the table above although you can apply for FP 2016 and IP 2016 it does not mean you will have more than one valid protection at the same time - please see PTM093210 for more information on FP 2016 and PTM094210 for IP 2016.

Relying on protection

Where a member wants to take their benefits and rely on a form of protection (other than FP 2016 or IP 2016) they will need to provide the scheme administrator with the reference number on the certificate issued by HMRC when they applied for protection. The scheme administrator may decide to ask the member for a copy of their protection certificate in order to confirm the value of their protected pension rights and to enable the scheme administrator to provide the correct percentage of the lifetime allowance used up.  Where a member has FP 2016 and/or IP 2016 they will only be given a reference number for each type of protection by HMRC – they will not have been issued with a certificate.  The scheme administrator should accept the reference number as evidence that the individual has the relevant protection.

If an individual wants HMRC to give details of their protection to their scheme administrator then they must authorise HMRC to do so by completing form APSS203.

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Reporting requirements

Where a member is crystallising their benefits and relying on protection then this may be a reportable event 6 and the scheme administrator may need to complete and submit an event report to HMRC, using Pension Schemes Online Service - See PTM161400.

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Pension sharing - impact on protections

The Welfare Reform and Pensions Act 1999 (or Welfare Reform and Pensions (Northern Ireland) Order 1999) includes provisions allowing for an individual’s pension rights to be split or shared with an ex-spouse following a divorce or dissolution of a civil partnership (see PTM029000) and introduces the concept of pension debits and pension credits. Where pension sharing occurs the amount awarded to an ex-spouse or former civil partner is referred to as a pension credit right. A pension credit right increases the ex-spouse’s or former civil partner’s pension rights. A pension debit is the corresponding amount by which the value of the original member’s pension rights are reduced to provide the pension credit. Pension credits and pension debits can both have an impact on an individual’s lifetime allowance.

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Pension credits and lifetime allowance enhancements

As a pension credit right will increase the ex-spouse’s or former civil partner’s existing pension rights, this may affect or increase their liability to the lifetime allowance charge. The legislation allows the ex-spouse or former civil partner to offset this increased liability by enhancing their lifetime allowance. This is done by claiming a lifetime allowance enhancement factor if certain conditions are met. How this is done depends on whether the pension credit rights were acquired before or on or after 6 April 2006. For more detail on pension credit rights acquired before 6 April 2006 see PTM092200. For more detail on pension credit rights acquired on or after 6 April 2006 see PTM095200.

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Pension debits and primary protection, individual protection 2014 and individual protection 2016 {#}

Where the original member has claimed any of primary protection, individual protection 2014 or individual protection 2016, a pension debit may reduce or eliminate the original’s member’s protection (for primary protection see PTM092300 and for either individual protection see PTM094400).

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Pension credit rights/pension debits and enhanced protection or any type of fixed protection {#}

In certain circumstances, pension credit rights may lead to the loss of any of the above protections by an ex-spouse or former civil partner while allowing the original member to rebuild their pension rights following a reduction as a result of a pension debit (see PTM092410 for enhanced protection and PTM093100 for fixed protection).