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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: cessation

Glossary PTM000001
   

 

Actions causing cessation of enhanced protection
Cessation of enhanced protection - relevant benefit accrual
Cessation of enhanced protection - transfers that are not permitted transfers
Permitted transfers
Permitted transfers to a defined benefits arrangement or cash balance arrangement
Cessation of enhanced protection - setting up a new arrangement
When setting up a new arrangement will not cause loss of enhanced protection
Setting up a new arrangement - automatic or auto-enrolment
Cessation of enhanced protection - impermissible transfers
Consequences of cessation
Consequences of cessation: example
Notification to HMRC of loss of enhanced protection

Actions causing cessation of enhanced protection

Paragraph 12(2) - 12(2C) Schedule 36 Finance Act 2004

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

Enhanced protection will be lost in the following circumstances:

  • where ‘relevant benefit accrual’ occurs under any arrangement in a registered pension scheme - see PTM092420 for more information
  • where a transfer is made from any arrangement holding rights for the individual in a registered pension scheme and that transfer is not a “permitted transfer” (see below)
  • where a new arrangement relating to the individual is made under a registered pension scheme otherwise than

    • to receive a permitted transfer
    • as part of a retirement-benefit activities compliance exercise (see below), or
    • as part of an age-equality compliance exercise(see below)
  • where an arrangement receives an impermissible transfer (see below); and
  • where the member notifies HMRC that they no longer wish to be covered by enhanced protection.

Cessation of enhanced protection - relevant benefit accrual

Paragraph 13 Schedule 36 Finance Act 2004

Whether or not ‘relevant benefit accrual’ occurs depends on the type of arrangement under which the individual’s benefits are being provided. There are different rules for:

  • other money purchase arrangements, and
  • cash balance arrangements or defined benefits arrangements.

PTM092430 explains in detail when ’relevant benefit accrual’ occurs in respect of each type of arrangement.

Essentially the relevant benefit accrual test for other money purchase arrangements is an input test. So payment of benefits from this type of arrangement will not trigger loss of enhanced protection but the payment of contributions to this type of arrangement on or after 6 April 2006 will in most circumstances.

The relevant benefit accrual test for defined benefits or cash balance arrangements is an output test. So contributions to these types of arrangement will not trigger loss of enhanced protection but the payment or transfer of benefits may cause loss of enhanced protection.

PTM092430 explains in detail when ’relevant benefit accrual’ occurs in respect of each type of arrangement.

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Cessation of enhanced protection - transfers that are not permitted transfers

Paragraph 12(2)(b) Schedule 36 Finance Act 2004

Any transfer that is not a permitted transfer (see below) automatically causes loss of enhanced protection from the date of the transfer. The following are examples of transfers that are not permitted transfers that trigger loss of enhanced protection:

  • A transfer from an other money purchase arrangement to a defined benefits arrangement or cash balance arrangement.
  • A transfer from a cash balance arrangement or defined benefits arrangement to a cash balance arrangement or defined benefits arrangements where the transfer is not made in connection with one of the winding up of the transferring scheme, a relevant business transfer or a retirement-benefit activities compliance exercise.
  • A transfer from a cash balance arrangement or defined benefits arrangement to a cash balance arrangement or defined benefits arrangement relating to a different employment to the transferring arrangement - except where there has been a relevant business transfer as described above.

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Permitted transfers

Paragraph 12(7) and (8) Schedule 36 Finance Act 2004

Article 35 The Taxation of Pension Schemes (Transitional Provisions) Order 2006 - SI 2006/572

A transfer will not cause the loss of enhanced protection if it is a permitted transfer.

A transfer is a permitted transfer if:

  1. all or part of the sums and assets or pension rights under an arrangement are transferred to form all or part of the assets of one or more other money purchase arrangements under a registered pension scheme or recognised overseas pension scheme. So any type of arrangement may transfer to an other money purchase arrangement. Where defined benefit or cash balance pension rights are transferred to an other money purchase arrangement, the value of the sums and assets received by the other money purchase arrangement must be actuarially equivalent to the rights being transferred. Pension rights may be transferred to other money purchase arrangement under more than one scheme. This, for example, will allow a transfer to a scheme that cannot accept protected rights whilst at the same time transferring the protected rights element to another scheme that is contracted out and so can accept those rights.
  2. all or part of the sums and assets or pension rights under a defined benefits or cash balance arrangement are transferred to form all or part of the assets of a defined benefits or cash balance arrangement under a registered pension scheme or recognised overseas pension scheme, but only where
* the transfer is made in connection with the winding up (see below for more detail) of the original pension scheme containing the cash balance or defined benefits arrangement, and the receiving cash balance or defined benefits arrangement relates to the same employment as the transferring arrangement that is being wound up, or
* the transfer is made in connection with a relevant business transfer - (see [Permitted transfers to a defined benefits arrangement or cash balance arrangement](#IDAZUMMB) below for more detail), or
* the transfer is made as part of a retirement-benefit activities compliance exercise - (see [Permitted transfers to a defined benefits arrangement or cash balance arrangement](#IDAZUMMB) below for more detail
  1. sums and assets being used for the provision of a scheme pension (crystallised benefits) are transferred to an insurance company as a result of the winding up of the transferring pension scheme.

Where a permitted transfer is made enhanced protection will not be lost and all of the constraints relating to enhanced protection apply equally to the arrangements to which the transfers are made.

A transfer of rights for an ex-spouse to another scheme following a pension sharing order which is a permitted transfer does not affect the enhanced protection of the individual whose rights are being reduced under the pension sharing order.

A transfer made in connection with a winding up

To be a permitted transfer, in some circumstances the transfer must be made in connection with the winding up of the pension scheme making the transfer. Whether or not a particular transfer meets this requirement is a question of fact. Where a decision is made to wind up a scheme and transfers are then made to facilitate the winding-up but before the winding-up process formally starts or is completed, HMRC will normally accept that the transfer is made in connection with the winding-up of the scheme. Although not a requirement, it may be beneficial if the scheme administrator of the transferring scheme kept copies of any document(s) evidencing that the intention to wind the scheme up pre-dated the decision to make the transfer.

To be a permitted transfer, the receiving arrangement must relate to the same employment as the transferring arrangement that is being wound up. HMRC will treat this requirement as having been met where a transfer has been made in accordance with either regulation 12(2)(a) or regulation 12(2)(b) of the Occupational Pension Schemes (Preservation of Benefits) Regulations 1991- SI 1991/167.

A scheme may have several employers participating in a scheme. Where an employer ceases to participate and leaves the scheme securing all the member’s rights from that employment outside the scheme, e.g. by transfer or annuity purchase, such a partial winding-up will constitute a scheme winding-up for the purposes of these provisions subject to all of the following circumstances being met:

  • there is a registered pension scheme which is an occupational pension scheme,
  • the occupational pension scheme comprises a number of different sections,
  • the scheme rules provide for individual sections to be wound up,
  • each section operates in respect of a particular employer participating in the scheme,
  • if an employer has more than one section under a pension scheme all the sections relating to that employer must be wound up.

The winding-up means that the employer’s entire participation in the scheme ceases.

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Permitted transfers to a defined benefits arrangement or cash balance arrangement

A transfer of all or part of the sums and assets, or rights, under an arrangement to a cash balance arrangement or defined benefits arrangement made under a registered pension scheme or a recognised overseas pension scheme is a permitted transfer if:

  • the benefits are transferred from a cash balance arrangement or defined benefits arrangement made under a registered pension scheme, and
  • the transfer is made in connection with one of the following three events:
    1. the winding up of the transferring scheme - as described above,
      1. a relevant business transfer, where the transferring arrangement relates to a current or former employment, or
      2. a retirement-benefit activities compliance exercise.

Relevant business transfer

Paragraph 12(8)(c), (8A) & (9)(c) Schedule 36 Finance Act 2004

A relevant business transfer is where:

  • all or part of a business or undertaking that involves at least 20 employees is transferred from one person to another, and
  • if both parties to the business transfer were companies, they would not be treated as members of the same group for the purposes of chapter 4, part 10 ICTA 1988.

For example ABC Bank plc sells its credit card division to XYZ Banking Ltd. The credit card division has 100 employees at the time ownership transfers. On the transfer of the business these 100 individuals cease to be employees of ABC Bank plc and become employees of XYZ Banking Ltd. Following the sale of the credit card division those employees with benefits in the ABC scheme have them transferred to the XYZ scheme. Both schemes provide defined benefits arrangements. For the purposes of the earnings recalculation test for relevant benefit accrual the earnings with XYZ Banking Ltd can be used.

Retirement-benefit activities compliance exercise

Paragraph 12(8)(d) and (8B) Schedule 36 Finance Act 2004

The registered pension scheme making the transfer must be an occupational pension scheme and have some members who only have the prospective right to pension and/or lump sum death benefits. In order to comply with section 255 Pensions Act 2004, or article 232 Pensions (Northern Ireland) Order 2005 those members whose rights consist only of prospective lump sum and/or pension death benefits need to be removed from the scheme.

This may be done by removing those individuals whose rights consist solely of prospective death benefits. Alternatively, a scheme may choose to completely separate all death benefit provision into another registered pension scheme (or recognised overseas pension scheme) leaving only pension rights under the transferring scheme.

Where sums and assets, or accrued rights, are transferred to another cash balance arrangement or defined benefits arrangement as part of a transaction so that the transferring scheme can comply with either section 255 or article 232, this will be a permitted transfer. This is subject to the proviso that the arrangement receiving the sums and assets, or accrued rights, provides similar prospective death benefits that relate to the same employment as the old arrangement.

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Cessation of enhanced protection - setting up a new arrangement

Paragraph 12(2)(c) Schedule 36 Finance Act 2004

Setting up a new arrangement will cause the loss of enhanced protection unless the member joined the new arrangement for one of the following reasons:

  • to receive a permitted transfer
  • as part of a retirement-benefit activities compliance exercise - see above, or
  • as part of an age-equality compliance exercise - see above.

So, where an individual joins a new pension arrangement and accrues either retirement or/and death benefits under the arrangement, enhanced protection will be lost.

A new arrangement is an arrangement that is new to the individual, i.e. they were not previously a member of the arrangement. So the arrangement can be one that has previously been in existence for other members and can be either in the same pension scheme or in a different pension scheme.

Whether or not an individual joins a new arrangement is a question of fact and will be influenced by the design of the scheme. It is possible for a scheme to have more than one arrangement of the same type, e.g. two defined benefits arrangements, for the same individual.

Where individual starts to accrue a new type of benefit under the scheme after 5 April 2006 this must be via a new arrangement. For example, a member being provided with only defined benefits under a scheme before 6 April 2006 but who then starts to accrue money purchase benefits must have become a member of a new money purchase arrangement in order to do so. Enhanced protection is therefore lost.

A scheme may increase the rate of benefits provided or even offer new extra benefits without having to provide it by means of a new arrangement. This is as long as the individual is a member of the same type of arrangement under the scheme on 5 April 2006 as that required to provide the type of benefits provided after 5 April 2006. For example, a member of a defined benefits arrangement on 5 April 2006 has a new form of benefit provided after that date. If these new benefits are also defined benefits they do not have to be provided under a new arrangement. But even where the benefits provided after 5 April 2006 are the same as the type of benefits provided before 6 April 2006, a scheme may still choose to provide those extra/new benefits via a new arrangement.

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When setting up a new arrangement will not cause loss of enhanced protection

Paragraphs 12(2)(c) and 12(2A) to 12(2C) Schedule 36 Finance Act 2004

Enhanced protection is not lost where a new arrangement for an individual is set up under a registered pension scheme

  • to receive a permitted transfer (see above),
  • as part of a retirement-benefit activities compliance exercise (see below), or
  • as part of an age-equality compliance exercise (see below).

Retirement-benefit activities compliance exercise

An arrangement is set up as part of a retirement-benefit activities compliance exercise if all the following conditions are met:

  • The new arrangement is set up in connection with the cancellation of rights under an old arrangement relating to the individual.
  • The old arrangement is held under a registered pension scheme that is an occupational pension scheme and has some members who have not accrued retirement benefits, they only have the prospective right to pension and/or lump sum death benefits. In order to comply with section 255 Pensions Act 2004, or article 232 Pensions (Northern Ireland) Order 2005 those members whose rights consist only of prospective (lump sum and/or pension) death benefits are removed from the scheme. The old arrangement is cancelled to enable the scheme to comply with section 255 or article 232.
  • Both the old and new arrangement relating to the individual are in respect of the same employment and there are prospective rights to either (or both) pension death benefits (within the meaning of section 167(1) Finance Act 2004) or lump sum death benefits (within the meaning of section 168(1) Finance Act 2004) under both arrangements.
  • The prospective rights to death benefits conferred under the new arrangement are not significantly different from the rights conferred under the old arrangement.

 

If the prospective right to death benefits remains in the original registered pension scheme and the member’s prospective pension benefits are moved out instead, this does not satisfy the requirements for a retirement-benefits activities compliance exercise. Unless the transfer of the prospective pension benefits is a permitted transfer, the new arrangement will cause loss of enhanced protection.

Age-equality compliance exercise

An arrangement is set up as part of an age-equality compliance exercise if all the following conditions are met:

  1. The new arrangement is set up in connection with the cancellation of rights under an old arrangement relating to the individual.
  2. Both the old and new arrangement are in respect of the same employment and there are prospective rights to either (or both) pension death benefits (within the meaning of section 167(1) Finance Act 2004) or lump sum death benefits (within the meaning of section 168(1) Finance Act 2004) under both arrangements.
  3. The old arrangement is cancelled and the new arrangement set up in order to comply with the Employment Equality (Age) Regulations 2006 or Employment Equality (Age) Regulations (Northern Ireland) 2006 - or any regulations amending or replacing these regulations.

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Setting up a new arrangement - automatic or auto-enrolment

Some employers automatically put their employees into their pension scheme. Under the provisions of Pensions Act 2008, some employers are subject to the automatic enrolment duty and are required to automatically enrol their employees into a pension scheme.

Pensions Act 2008 provisions for automatic enrolment

If an employer is subject to the automatic enrolment duty and automatically enrols an employee into a new pension scheme under the provisions of Pensions Act 2008, the employee will have one month from the enrolment date to opt out of the new scheme. If they opt out within that one-month period then the law treats them as if they were never a member of the pension scheme. So if an employee is subject to automatic enrolment under the Pensions Act 2008 provisions and opts out within one month, they will keep their enhanced protection. If they do not opt out in time then they will lose their protection. The employer will have a duty to automatically enrol those who have opted out every three years, so each time this happens the employee will need to opt out within one month.

If an individual changes employer and that new employer is subject to the automatic enrolment duty under Pensions Act 2008, they will be required to automatically enrol the individual into their pension scheme. If an individual has enhanced protection, they will also need to ‘opt out’ of their new employer’s pension scheme when they are automatically enrolled to avoid losing their protection.

With effect from 1 April 2015, The Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations (S.I. 2010/772) have been amended so that, where the employer has reasonable grounds to believe that a jobholder has enhanced protection, fixed protection or fixed protection 2014 (with the onus on the jobholder to tell them so), they are no longer required to automatically enrol or re-enrol that jobholder, meaning that there will not be a need for the jobholder to opt out. It will be a matter for the employer to decide whether or not to exercise the discretion not to auto-enrol or re-enrol the jobholder and to decide what is reasonable grounds to believe the jobholder has enhanced protection, fixed protection or fixed protection 2014. A copy of the HMRC certificate is one such way to demonstrate reasonable grounds.

Auto-enrolment that is not under Pensions Act 2008 provisions

If an employer automatically enrols an employee into their pension scheme and this is NOT under the Pensions Act 2008 provisions, the member will normally lose enhanced protection because they will have started a new pension arrangement. But they will not lose their protection if the scheme has a legally binding rule that treats an individual who opts out of scheme membership as never having been a member of the scheme, or if the individual has cancelled the pension contract under the FCA cancellation rules with the result that the contract is treated as void from the start.

If an individual has applied for enhanced protection and they think that automatic enrolment into a new scheme that is not auto-enrolment under the Pensions Act 2008 provisions would mean that they will lose their enhanced protection, then they should speak to their employer or prospective employer at an early stage to avoid being enrolled at all and their employer will be able to tell them how they can do this.

Refunds of “contributions” after opting out of auto-enrolment

Where a member opts out in circumstances where they are treated in law as never having been a member of the scheme then any payments into the scheme, whether by the member or their employer, are not contributions and can be refunded by the scheme. As the individual has never been a member of the scheme, the payments made cannot have been held for the purposes of the scheme. So their repayment is not a payment by the scheme for the purposes of the pensions tax legislation.

As a result the payments are neither authorised nor unauthorised payments and so are not liable to any tax charge under the pensions tax legislation. But any tax relief that was given at the time of the payment into the scheme will no longer be due.

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Cessation of enhanced protection - impermissible transfers

Paragraphs 12(2)(aa) and 17A Schedule 36 Finance Act 2004

A transfer, or other action, that is defined as an impermissible transfer causes enhanced protection to be lost.

The following are impermissible transfers into a money purchase arrangement that is not a cash balance arrangement (an other money purchase arrangement):

  • a transfer of sums or assets from an arrangement under a registered pension scheme not relating to the individual. However, a transfer pursuant to a pension sharing order is not an impermissible transfer and will not cause the loss of enhanced protection.
  • a transfer of sums or assets which were held otherwise than by a pension scheme.
  • the payment of a transfer lump sum death benefit into the arrangement. (A transfer lump sum death benefit could only be paid in respect of a member who died before 6 April 2007).

There is an impermissible transfer if at any time after 5 April 2006 there has been a transfer or payment of the type specified above to a hybrid arrangement and that hybrid arrangement later becomes an other money purchase arrangement.

There is an impermissible transfer if at any time after 5 April 2006 a defined benefits arrangement or a cash balance arrangement for an individual becomes an other money purchase arrangement for that individual under that scheme.

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Consequences of cessation

Paragraphs 12(3) and 49(2) Schedule 36 Finance Act 2004

Regulation 9 The Registered Pension Schemes (Enhanced Lifetime Allowance) Regulations - SI 2006/131

As explained in detail above, an individual who has registered for enhanced protection will lose it if they do not comply with the conditions for enhanced protection.

Once enhanced protection ceases, benefit crystallisation events for the individual are potentially liable to the lifetime allowance charge.

The tax treatment, for the purposes of the lifetime allowance charge, of earlier benefit crystallisation events whilst enhanced protection was valid will not be re-visited when enhanced protection ceases.

An individual who had lump sum rights of more than £375,000 that included uncrystallised lump sum rights on 5 April 2006 will lose their lump sum protection on cessation of enhanced protection. Unless another form of lump sum protection applies (see below) pension commencement lump sums should be paid under the normal rules described at PTM063200.

If the individual claimed primary protection as well as enhanced protection they will revert to primary protection once enhanced protection ceases. If on 5 April 2006 the individual had lump sum rights of more than £375,000 that included uncrystallised lump sum rights protection of lump sums as described at PTM063300 will apply.

Where primary protection was not claimed the individual will revert to the standard lifetime allowance once enhanced protection ceases.

If the individual:

  • had not claimed primary protection,
  • had lump sum rights of more than £375,000 on 5 April 2006, and
  • in any scheme on 5 April 2006 they had uncrystallised lump sum rights worth more than 25 per cent of their total uncrystallised rights in that scheme,

the individual will revert to scheme specific lump sum protection (see PTM063100).

At benefit crystallisation events after cessation of enhanced protection, the amount of the available lifetime allowance under section 219 Finance Act 2004 will be calculated in the usual way. (Benefit crystallisation events whilst enhanced protection was valid still use up the lifetime allowance.)

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Consequences of cessation: example

Jill claimed pension rights valued at £4.5 million under enhanced protection. She also registered £4.5 million for primary protection giving an enhancement factor of +2 x the standard lifetime allowance.

In 2023 Jill’s pension rights had grown to £6 million. Jill decided to take benefits of £3 million leaving £3 million uncrystallised pension rights. For the purposes of this example, it is assumed that the standard lifetime allowance in 2023 was £1.5 million. The £3 million benefit was protected from the operation of the lifetime allowance charge because of enhanced protection.

Jill notified HMRC in 2025 that she had made contributions to her money purchase arrangement held in a registered pension scheme. Due to the contributions, Jill lost her enhanced protection and fell back onto her primary protection. At that time, her uncrystallised pension rights were worth £3.6 million.

In 2032 Jill took the remainder of her benefits, now worth £5 million. For the purposes of this example, it is assumed that the standard lifetime allowance in 2032 was £1.5 million. Jill had protection from the lifetime allowance charge of £1.8 million plus 2 x £1.8 million, giving a personal lifetime allowance of £5.4 million under primary protection.

The amount of her available lifetime allowance is £5.4 million less the value of the benefit crystallisation event in 2023.

The value of that benefit crystallisation event is its original value, increased by the proportionate change in the levels of the standard lifetime allowance between 2023 and 2032. So the value of the earlier benefit crystallisation event is

£3 million x (£1.5 million/£1.5 million) = £3 million.

So in 2032 Jill’s remaining available personal lifetime allowance is £2.4 million (£5.4 million - £3 million). As Jill’s remaining benefits are valued at £5 million she has a liability to the lifetime allowance charge.

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Notification to HMRC of loss of enhanced protection

Section 263 Finance Act 2004

Individuals who notified rights to enhanced protection to HMRC and who lose or give up this right should notify HMRC of this fact. If enhanced protection is lost because relevant benefit accrual has occurred, the individual must notify HMRC within 90 days of the occurrence. Where the individual fails to notify HMRC within the 90 day period there will be a financial penalty.