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HMRC internal manual

Pensions Tax Manual

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Protection from the lifetime allowance charge: protecting Pre-April 2006 pension rights: enhanced protection: overview

Glossary PTM000001
   

Introduction
Notification to HMRC
The limit on protected pension rights
Protection from the lifetime allowance charge
Protection from the annual allowance charge
Cessation of enhanced protection
Pension credits and enhanced protection
Pension debits and enhanced protection
Enhanced protection and death benefits
When contributions to provide death benefits can be paid to an other money purchase arrangement for an individual with continuing enhanced protection
Enhanced protection and death benefits - the sequence of events

Introduction

Individuals who had certain rights at 5 April 2006 could apply to HMRC to protect them from the lifetime allowance charge when those rights come into payment (crystallise) after 5 April 2006.

The rights that could be protected are pension rights plus any separate lump sum rights, such as the lump sum rights which usually occur in public sector pension schemes. Lump sums by commutation of pension form part of an individual’s pension rights - they are not separate lump sum rights.

Death benefits are not similarly protected because they are contingent benefits to which the individual does not have an absolute entitlement. However, death benefits may be paid within the protected limits for pension benefits.

Unlike primary protection, individuals could claim enhanced protection regardless of the value of their pension rights at 5 April 2006.

An individual is not liable to the lifetime allowance charge whilst they have enhanced protection. However at any benefit crystallisation event the scheme administrator must still obtain and give information just as if the individual did not have protection.

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Notification to HMRC

The Registered Pension Schemes (Enhanced Lifetime Allowance) Regulations 2006 - SI 2006/131

To claim enhanced protection, an individual must have notified HMRC of their intention to rely on this protection. This notification must have been made on or before 5 April 2009 and not before 6 April 2006.

On receipt of the form, HMRC processed the form and issued a certificate with a unique reference number to the individual.

Guidance on the notification process can be located on the National Archives (external users see http://webarchive.nationalarchives.gov.uk/20140104211445/http://www.hmrc…).

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The limit on protected pension rights

Paragraph 12(5) Schedule 36 Finance Act 2004

The Registered Pension Schemes (Surrender of Relevant Excess) Regulations 2006 - SI 2006/211

Paragraph 12(5) Schedule 36 Finance Act 2004 states that an individual could not give notice of an intention to rely on enhanced protection where the individual’s uncrystallised pension rights on 5 April 2006 were excessive. Excess rights arose whenever the value of pension rights in all retirement benefit schemes and deferred annuity contracts (section 32 policies) for an employment was greater than the value of the maximum permitted pension for that employment. In order to claim enhanced protection the individual needed to surrender those excess rights. A surrender needed to take place between 6 April 2006 and the time when an individual made a notification to HMRC of their intention to rely on enhanced protection. Further details on excess rights can be found on the National Archives athttp://webarchive.nationalarchives.gov.uk/20140504142140/http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM03104032.htm

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Protection from the lifetime allowance charge

Paragraph 12(3)(a) & (b) Schedule 36 Finance Act 2004

Whilst enhanced protection remains valid, an individual:

  • has no liability to the lifetime allowance charge on any benefit crystallisation event, and
  • cannot take a lifetime allowance excess lump sum.

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Protection from the annual allowance charge

Paragraph 49 Schedule 36 Finance Act 2004

For guidance applicable to the tax years prior to 2011-12 see National Archives at http://webarchive.nationalarchives.gov.uk/20140504142140/http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM03104050.htm

For tax years from 2011-12 onwards, the provisions relating to the annual allowance charge apply in relation to the individual even though their enhanced protection remains valid.

For more details about the annual allowance and the annual allowance charge see PTM050000.

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Cessation of enhanced protection

Paragraph 12(2) Schedule 36 Finance Act 2004

Regulation 4 The Registered Pension Schemes (Enhanced Lifetime Allowance) Regulations 2006 - SI 2006/131

Individuals who claimed enhanced protection can lose this protection at any time as a consequence of certain actions. For instance they may change employment and wish to become an active member of their new employer’s registered pension scheme, or they might pay a contribution to an insured scheme.

An individual can also choose to no longer be covered by enhanced protection. An individual must notify HMRC in writing if they no longer wish enhanced protection to apply to them.

PTM092420 gives more information on what causes loss of enhanced protection and the consequences of loss of protection.

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Pension credits and enhanced protection

If an individual receives a pension credit as a result of a pension sharing order after 5 April 2006 and the individual has enhanced protection the individual may lose enhanced protection as a result of receiving the pension credit. Whether or not this occurs depends on how the pension credit is received.

If the pension credit is transferred into a new arrangement for the individual enhanced protection will be lost due to the setting up of a new arrangement as the transfer of a pension credit is not a permitted transfer.

However, if the pension credit is transferred into an existing other money purchase arrangement this is not a relevant contribution (see PTM092430) and the transfer will not cause loss of protection.

If the pension credit is transferred into an existing defined benefits or cash balance arrangement enhanced may be lost at a later stage if relevant benefit accrual occurs - see PTM092430.

PTM023000 provides further details on types of arrangements.

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Pension debits and enhanced protection

Paragraph 13 Schedule 36 Finance Act 2004

Whether or not an individual with enhanced protection can rebuild their pension rights after they have been reduced due to a pension debit depends on the type of the individual’s arrangements. PTM023000 explains the types of arrangements.

Contributions to an other money purchase arrangement after 5 April 2006 normally lead to relevant benefit accrual causing the loss of enhanced protection. So pension benefits under this type of arrangement cannot be rebuilt following a pension debit.

However, where pension rights under a defined benefits or cash balance arrangement are reduced due to a pension debit it may be possible to rebuild pension rights under that arrangement. This is subject to the benefits crystallising from the arrangement being no more than the appropriate limit. If the rebuilding of pension rights results in relevant benefit accrual enhanced protection will be lost.

See PTM092430 for more detail about relevant benefit accrual.

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Enhanced protection and death benefits

Under enhanced protection the impact of the funding for or payment of lump sum death benefits differs depending upon the type of arrangement - see PTM023000 for an explanation of the types of arrangements.

Other money purchase arrangements

Paragraph 14(3) to (5) Schedule 36 Finance Act 2004

For other money purchase arrangements and some hybrid arrangements that become other money purchase arrangements, the payment of a relevant contribution to the arrangement will cause the loss of enhanced protection.

Paragraph 14(3) and (4) Schedule 36 Finance Act 2004 allows contributions to be made to an other money purchase arrangement or to a relevant hybrid arrangement without loss of enhanced protection where certain conditions are satisfied - see When contributions to provide death benefits can be paid to an other money purchase arrangement for an individual with continuing enhanced protection below. A relevant hybrid arrangement is an arrangement under an occupational pension scheme that becomes an other money purchase arrangement and the hybrid would have paid a lump sum death benefit if the individual had died on 5 April 2006.

Defined benefits arrangements and cash balance arrangements

Paragraph 15A Schedule 36 Finance Act 2004

For defined benefits and cash balance arrangements, enhanced protection is lost where the value of the lump sum death benefits paid (whether defined benefits lump sum death benefit or uncrystallised funds lump sum death benefit) exceeds the available amount of the individual’s appropriate limit. (PTM092430 explains what the appropriate limit is.)

Payment of any other authorised lump sum death benefit is not a benefit crystallisation event and so will not cause loss of enhanced protection.

Paragraph 15A Schedule 36 Finance Act 2004 allows the value of an individual’s appropriate limit to be increased (where appropriate) where a recipient of a lump sum notifies HMRC. The appropriate limit will be increased if the current value of the individual’s ‘pre-commencement rights to death benefits’ relating to the employment is greater than the appropriate limit previously calculated and so these lump sum death benefits will not be subject to a lifetime allowance charge in respect of pension rights relating to the employment.

The current value of an individual’s ‘pre-commencement rights to death benefits’ relating to an employment is the amount of those rights as at 5 April 2006 increased to the greater of:

  • the lump sum amount increased by the amount of the relevant indexation percentage and,
  • the lump sum amount derived from a re-calculation of the value of the rights as at 5 April 2006 using the individual’s earnings immediately before their death. (This re-calculation is relevant only where the amount of the lump sum death benefit is a function of earnings.)

the lump sum amount increased by the amount of the relevant indexation percentage and,

the lump sum amount derived from a re-calculation of the value of the rights as at 5 April 2006 using the individual’s earnings immediately before their death (This re-calculation is relevant only where the amount of the lump sum death benefit is a function of earnings).

PTM092300 (see the section ‘Protection from the lifetime allowance charge for certain lump sum death benefits’) explains how to determine the value of ‘pre-commencement rights to death benefits’ as at 5 April 2006. For the purposes of the re-calculation of the appropriate limit the individual’s ‘pre-commencement rights to death benefits’ will include only rights to lump sum death benefits on 5 April 2006 that would have been payable in respect of the pensionable employment to which the defined benefits arrangements and/or cash balance arrangements relate.

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When contributions to provide death benefits can be paid to an other money purchase arrangement for an individual with continuing enhanced protection

Paragraphs 14(3) -( 5) Schedule 36 Finance Act 2004

Contributions may be paid to an other money purchase arrangement after 5 April 2006 where:

  1. they are used to pay premiums under a policy of insurance and that policy of insurance was made before 6 April 2006. However where such a policy is surrendered and replaced by a new one either as part of:
* a retirement-benefit activities compliance exercise, or
* an age-equality compliance exercise

the new policy can be treated as a pre 6 April 2006 policy.

  1. there is no right to surrender any rights under the policy.
  2. there are no payments under the policy except on the individual’s death, and
  3. the policy is not varied significantly to either increase the prospective benefits or extend the term of the policy. Guidance on what is a significant variation to an insurance policy can be found in the Insurance Policyholder Taxation Manual at IPTM8145 and IPTM8150. However a variation made in order to comply with the Employment Equality (Age) Regulations 2006 - SI 2006/1031 - or the Employment Equality (Age) Regulations (Northern Ireland) 2006 - SR 2006/261 - or any regulations amending or replacing them, can be ignored for the purposes of this test.

Surrendering a policy as part of a retirement-benefit compliance exercise

An occupational pension scheme as defined by section 1 Pension Schemes Act 1993 cannot include members whose only right under the scheme is the potential right to death benefits, i.e. they are not accruing pension benefits. In order to comply with either section 255 of the Pensions Act 2004 or Article 232 of the Pensions (Northern Ireland) Order 2005 - SI 2005/255 - such members may be removed from the scheme. Alternatively, schemes may choose to comply by removing all death benefit provision from the scheme leaving only pension benefits under the occupational pension scheme.

Where an insurance policy in existence on 5 April 2006 is surrendered and a new policy is taken out under another registered pension scheme:

  • in order to ensure the original occupational pension scheme complies with either section 255 or article 232, and
  • the rights under the old policy and the new policy are not significantly different

the new policy can be treated as a pre-6 April 2006 policy.

Surrendering a policy as part of an age-equality compliance exercise

Where an insurance policy in existence on 5 April 2006 is surrendered and a new policy is taken out:

  • in order to comply with the Employment Equality (Age) Regulations 2006 or the Employment Equality (Age) Regulations (Northern Ireland) 2006 (or any regulations amending or replacing them) and
  • any significant difference between the old and new policy is solely due to complying with those regulations

the new policy can be treated as a pre-6 April 2006 policy.

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Enhanced protection and death benefits - the sequence of events

On death the rules for enhanced protection continue to work as usual. Benefit crystallisation events (payments of defined benefits lump sum death benefits and uncrystallised funds lump sum death benefits) occur in their actual sequence and enhanced protection is retained or lost depending on whether ‘relevant benefit accrual’ has occurred.

The payment of an uncrystallised funds lump sum death benefit from an other money purchase arrangement is not ‘relevant benefit accrual’ and so cannot trigger loss of enhanced protection.

The payment of an uncrystallised funds lump sum death benefit from a cash balance arrangement and the payment of a defined benefits lump sum death benefit from a defined benefits arrangement are benefit crystallisation events so are tested against the ‘appropriate limit’ calculated as at the date of payment. The ‘appropriate limit’ is based either on the value of the deceased member’s pension rights on 5 April 2006 or on the value of the ‘pre-commencement rights to death benefits’ on 5 April 2006. The payment of a lump sum death benefit that exceeds the available amount of the ‘appropriate limit’ will trigger loss of enhanced protection - see PTM092420.