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HMRC internal manual

Pensions Tax Manual

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Protection from the lifetime allowance charge: fixed protection, fixed protection 2014 and fixed protection 2016: essential principles

 

Glossary PTM000001
   

Due to the similarities in the principles of these three types of protection this guidance covers them all unless otherwise specified and the three types of fixed protection are referred to collectively on this page as “the fixed protection(s)”.

Fixed protection
Fixed protection 2014
Fixed Protection 2016
Conditions for keeping the fixed protections
Pension credits and the fixed protections
Pension debits and the fixed protections
How the ‘scheme pays’ process for an annual allowance charge affects the lifetime allowance
Paying benefits to someone with one of the fixed protections
 

Fixed protection

Paragraph 14 Schedule 18 Finance Act 2011

From 6 April 2012 the lifetime allowance was reduced to £1.5 million from the level of £1.8 million in tax year 2011-12. As individuals might have already built up savings of more than £1.5 million or had planned to do so in the expectation that the lifetime allowance would not reduce from the 2011-12 level, a new form of protection called “fixed protection” (FP 2012) was introduced.

Where an individual expected their pension savings might be more than £1.5 million (including taking into account past crystallisations) when they came to take their benefits on or after 6 April 2012, FP 2012 can help reduce or eliminate the lifetime allowance charge. FP 2012 allows individuals to crystallise benefits worth up to £1.8 million without paying the lifetime allowance charge, although the ability to accrue further benefits is limited.

People wishing to rely on FP 2012 had to notify HMRC by 5 April 2012.

If someone has FP 2012, their lifetime allowance is fixed at £1.8 million rather than the standard lifetime allowance.

If, in future, the standard lifetime allowance rises to be more than £1.8 million, the member’s FP 2012 will stop. They will no longer need protection, as the standard lifetime allowance will be more advantageous. Their lifetime allowance will be the standard lifetime allowance.

Anyone who did not have either primary protection or enhanced protection could have applied for FP 2012. 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 FP 2012, they had to meet certain conditions. These are that on 6 April 2012 they:

  • were a member of a registered pension scheme or a relieved member of a relevant non-UK pension scheme (see PTM113410 for definitions of a ‘relieved member’ and a ‘relieved non-UK pension scheme’),
  • did not have primary protection (see PTM092300 and
  • did not have enhanced protection (see PTM092400).

Once an individual has FP 2012, there are restrictions on what they are able to do with their benefits. For example, they will normally have needed to stop building up benefits under every registered pension scheme that they belong to by 5 April 2012.

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Fixed protection 2014

Paragraph 1 Schedule 22 Finance Act 2013

From 6 April 2014 the lifetime allowance was reduced to £1.25 million from the level of £1.5 million in tax year 2013-14. For individuals who had already built up pension savings of more than £1.25 million or planned to do so in the expectation that the lifetime allowance would not reduce from the 2013-14 level, a new form of protection called “fixed protection 2014” (FP 2014) was introduced.

The legislation for FP 2014 applies from 6 April 2014 and broadly follows that for the existing fixed protection, which is also covered in this guidance.

Where a member expected their pension savings to be more than £1.25 million (including taking into account past benefits crystallised) when they came to take any benefits on or after 6 April 2014, they can use FP 2014 to help reduce or eliminate the lifetime allowance charge. FP 2014 allows the member to crystallise benefits worth up to £1.5 million without paying the lifetime allowance charge, although the ability to accrue further benefits is limited.

People wishing to rely on FP 2014 had to notify HMRC by 5 April 2014.

If someone has FP 2014, their lifetime allowance is fixed at £1.5 million rather than the standard lifetime allowance, which was £1.25 million from 6 April 2014.

If, in future, the standard lifetime allowance rises to be more than £1.5 million, the member’s FP 2014 will stop. They will no longer need protection, as the standard lifetime allowance will be more advantageous. Their lifetime allowance will be the standard lifetime allowance.

Anyone who did not have FP 2012, primary protection or enhanced protection could apply for FP 2014. The member did not need to have already built up pension savings of more than £1.25 million to apply. If someone wanted to apply for FP 2014, they had to meet certain conditions. These are that on 6 April 2014 they:

  • were a member of a registered pension scheme or a relieved member of a relevant non-UK pension scheme (see PTM113410 for definitions of a ‘relieved member’ and a ‘relieved non-UK pension scheme’).
  • did not have primary protection (see PTM092300 for more detail),
  • did not have enhanced protection (see PTM092400 for more detail), and
  • did not have FP 2012 when applying for FP 2014.

Once an individual has FP 2014 there are restrictions on what they are able to do with their future pension savings. For example, they will normally have needed to stop building up benefits under every registered pension scheme that they belong to by 5 April 2014.

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Fixed protection 2016

Parts 1 and 3 Schedule 4 Finance Act 2016

From 6 April 2016 the lifetime allowance was reduced to £1 million from the level of £1.25 million in tax year 2015-16. For individuals who had already built up pension savings of more than £1 million or planned to do so in the expectation that the lifetime allowance would not reduce from the 2015-16 level, a new form of protection called “fixed pProtection 2016” (FP 2016) was introduced.

The legislation for FP 2016 applies from 6 April 2014 and broadly follows that for the existing fixed protections, which are also covered in this guidance.

Where a member expected their pension savings to be more than £1 million (including taking into account past benefits crystallised) when they came to take any benefits on or after 6 April 2016 they can use FP 2016 to help reduce or eliminate the lifetime allowance charge. FP 2016 allows the member to crystallise benefits worth up to £1.25 million without paying the lifetime allowance charge, although the ability to accrue further benefits is limited.

There is no deadline for people wishing to rely on FP 2016 to notify HMRC.

If someone has FP 2016, their lifetime allowance is fixed at £1.25 million rather than the standard lifetime allowance, which was £1 million from 6 April 2016 until 5 April 2018, after which it will be increased for each tax year by the percentage increase (if any) in the consumer price index for the 12 period ending with the month of September in the previous tax year.

If, in future, the standard lifetime allowance rises to be more than £1.25 million, the member’s FP 2016 will stop. They will no longer need protection, as the standard lifetime allowance will be more advantageous. Their lifetime allowance will be the standard lifetime allowance.

Anyone who, on 6 April 2016, did not have FP 2014, FP 2012, individual protection 2014 (IP 2014), primary protection or enhanced protection can apply for FP 2016. The member did not need to have already built up pension savings of more than £1 million to apply. If someone wants to apply for FP 2016, they have to meet certain conditions. These are that on 6 April 2016 they:

  • were a member of a registered pension scheme or a relieved member of a relevant non-UK pension scheme (see PTM113410 for definitions of a ‘relieved member’ and a ‘relieved non-UK pension scheme’).
  • did not have primary protection (see PTM092300 for more detail),
  • did not have enhanced protection (see PTM092400 for more detail), and
  • did not have FP 2012 or FP 2014 when applying for FP 2016
  • did not IP 2014 (see PTM094200 for more detail) when applying for FP 2016

Once an individual has FP 2016 there are restrictions on what they are able to do with their future pension savings. For example, they will normally have needed to stop building up benefits under every registered pension scheme that they belong to by 5 April 2016.

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Conditions for keeping the fixed protections

The conditions for an individual to keep any of the protections are that they:

  • 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 individual breaches one of these conditions, they will lose their fixed protection. The individual must tell HMRC if they lose their fixed protection. See PTM093400 for more information about how and when fixed protection can be lost.

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Pension credits and the fixed protections

If an individual receives a pension credit as a result of a pension sharing order after the effective date of the protection, the individual may lose their 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 the 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 PTM093510) and the transfer will not cause loss of protection.

If the pension credit is transferred into an existing defined benefits or cash balance arrangement protection will be lost if as a result the member’s rights in the arrangement are increased by an amount that exceeds the relevant percentage - see PTM093510 and PTM093600.

PTM023000 provides further details on types of arrangements.

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Pension debits and the fixed protections

Whether or not an individual with one of the fixed protections 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 made to an other money purchase arrangement after the effective date of the protection normally lead to benefit accrual causing the loss of the protection – see PTM093510. 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 without losing the protection provided that the relevant percentage is not exceeded see PTM093510 and PTM093600.  As benefit accrual is an ongoing test carried out by reference to the extent of any increase in pension rights in each tax year, rebuilding would generally need to take place during the tax year in which the pension debit reduction occurred.

How the ‘scheme pays’ process for an annual allowance charge affects the lifetime allowance

PTM056400 contains guidance on 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. Before the pension comes into payment, Paul uses ‘scheme pays’ to meet an annual allowance charge and the scheme administrator makes a consequential adjustment to his 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 PTM088000 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 any of the fixed protections {#}

If a member has any of the fixed protections 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 the fixed protection.

Even where the member does not want to crystallise benefits in excess of the standard lifetime allowance, they should tell their scheme administrator that they have the fixed protection. This will enable their scheme administrator to calculate the percentage of their lifetime allowance used up.

A member must give their scheme administrator the FP 2012 or FP 2014 certificate reference number or the FP 2016 referfence number (HMRC does not issue a certificate for FP 2016); this is the minimum legal requirement. The scheme administrator may ask to see a copy of the FP 2012 or FP 2014 certificate or the correspondence from HMRC telling the member their reference number for FP 2016.

Where a member has received a FP 2012 or FP 2014 certificate, or for FP 2016 has received a reference number or has an appeal in progress against withdrawal of their reference number (see PTM093200 for more detail), but before they take all of their benefits:

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

then they will lose FP 2012 or FP 2014 from the date the event above occurred and can no longer rely on the FP 2012 or FP 2014 certificate that was issued to them. A member must tell HMRC if they lose FP 2012 or FP 2014.  For FP 2016, the protection is lost from the date the event above occurred and they can no longer rely on the reference number issued to them nor continue with a pending application or appeal against HMRC’s withdrawal of a reference number.  And if they have still to do so, they can no longer apply for FP2016. In any of these circumstances, a member must tell HMRC if one of the above events (known as “protection-cessation events” for the purposes of FP 2016) occurs.  See PTM093400 for more detail on how the fixed protections can be lost.

When the scheme administrator starts to pay the member’s benefits, they need to satisfy themselves that there is no lifetime allowance charge due. If the lifetime allowance charge is due a scheme administrator needs to know how much is due. A scheme administrator is jointly and severally liable to pay the lifetime allowance charge where the event triggering the lifetime allowance test is not a post-death benefit crystallisation event. A scheme administrator also has to report the member’s liability to the lifetime allowance charge to HMRC on the accounting for tax (AFT) return. Guidance on reporting and paying the lifetime allowance charge can be found at PTM162000.

Unless a scheme administrator is told otherwise, they must proceed on the basis that a 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 will proceed on the basis that the member has a standard lifetime allowance of:

  • £1.8 million where the member has FP 2012, (unless the standard lifetime allowance has risen to more than £1.8 million), or
  • £1.5 million where the member has FP 2014, (unless the standard lifetime allowance has risen to more than £1.5 million)
  • £1.25 million where the member has FP 2016 (unless the standard lifetime allowance has risen to more tthan £1.25 million)

when the member comes to take their benefits.

This means that while the standard lifetime allowance remains below £1.8 million for individuals with FP 2012 or £1.5 million for individuals with FP 2014 or £1.25 million for individuals with FP 2016:

  • as long as the individual’s total benefits are not worth more than these respective amounts there is no lifetime allowance charge
  • if they do not have scheme specific lump sum protection their maximum pension commencement lump sum will be the lower of

    • 25 per cent of the available lifetime allowance set by either FP 2012 (£1.8 million) or FP 2014 (£1.5 million) or FP 2016 (£1.25 million) as appropriate, and
    • 25 per cent of the amount crystallising under the scheme at that time.

If using the fixed protection means that the member has either:

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

a scheme administrator must tell HMRC that the member has used their fixed protection using the event report submitted annually to HMRC. This is a ‘reportable event 6’. PTM161400 explains what needs to be reported to HMRC.

The member must also include on their self-assessment return the amount of any lifetime allowance charge due and the amount of lifetime allowance charge paid by the scheme administrator.

After crystallising benefits, a scheme administrator must give the member a statement showing how much of the standard lifetime allowance has been used up by the benefit crystallisation event. The percentage shown on the certificate should be calculated as a percentage of their protected lifetime allowance, which is £1.8 million for individuals with FP 2012 or £1.5 million for individuals with FP 2014 or £1.25 million for people with FP 2016.