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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: losing the protection

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)”.

Member’s requirement to tell HMRC if they lose their fixed protection
Keeping the fixed protection when a member joins a new pension scheme
Joining a new arrangement and keeping the fixed protection
Automatic enrolment or auto-enrolment
Making contributions to an arrangement if the individual has any of the fixed protections
Transfers that allow the member to keep their fixed protection
Transfers that will cause an individual to lose their fixed protection
Impermissable transfers that will cause an individual to lose their fixed protection

Fixed Protection (FP 2012) - Paragraph 14(4) and (4A) Schedule 18 Finance Act 2011

Fixed Protection 2014 (FP 2014) - Paragraph 1(3) and (19) Schedule 22 Finance Act 2013

Fixed protection (2016) (FP 2016) - Paragraph 1(1)(b) and (3) and paragraph 8 Schedule 4 Finance Act 2016

A member cannot give up their fixed protection.  But they may lose it if, on or after:

  • 6 April 2012 for a registered pension scheme or 6 April 2013 for a relieved non-UK scheme in the case of FP 2012,
  • 6 April 2014 in the case of FP 2014, or
  • 6 April 2016 in the case of FP 2016

any of the following occur:

  • they have benefit accrual under a registered pension scheme or a relieved non-UK pension scheme (see PTM093500 for more information on what benefit accrual means)
  • there is an impermissible transfer into any arrangement they have in a registered pension scheme
  • there has been a transfer of sums and assets in an arrangement they have under a registered pension scheme that is not a permitted transfer; or
  • they have made a new arrangement under a registered pension scheme other than in permitted circumstances.

Once the fixed protection is lost, all subsequent benefit crystallisation events in relation to a member are tested by reference to the prevailing standard lifetime allowance.

Member’s requirement to tell HMRC if their fixed protection

FP 2012 - The Registered Pension Schemes (Lifetime Allowance Transitional Protection) Regulations 2011 - SI 2011/1752

FP 2014 - The Registered Pension Schemes and Relieved Non-UK Pension Schemes (Lifetime Allowance Transitional Protection) Regulations 2013 - SI 2013/1741

FP 2016 - Paragraph 17 Schedule 4 Finance Act 2016All the fixed Protections - Section 98 Taxes Management Act 1970

FP 2012 and FP 2014 - Section 251 Finance Act 2004

A member is responsible for telling HMRC that their fixed protection no longer applies. The member must do this within 90 days of the loss of FP 2012 or, for FP 2014 and FP 2016 within 90 days of the day on which they could first reasonably be expected to have known they had lost their protection. If the member does not do this then they will be liable to penalties of up to £300 for failure to notify and daily penalties of up to £60 per day after the initial penalty is raised.

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Keeping the fixed protection when a member joins a new pension scheme

FP 2012 - Paragraph 14(4) (d) and (10) Schedule 18 Finance Act 2011

FP 2014 - Paragraph 1(3) (d) and (9) Schedule 22 Finance Act 2013

FP 2016 - Paragraph 1(1) and (3) Schedule 4 Finance Act 2016

All fixed protections - Paragraph 12(2A) - (2C) Schedule 36 Finance Act 2004

An individual can only join a new pension scheme and keep their fixed protection if joining that new pension scheme is under ‘permitted circumstances’. See the next section for more information on permitted circumstances.

The most common of the permitted circumstances is when the reason for joining the new scheme is to receive a transfer of pension rights from another pension scheme. To keep the fixed protection the transfer must be a ‘permitted transfer’. So, for example, an individual could transfer benefits from one personal pension scheme into a new personal pension scheme. As long as no contributions are paid to the new personal pension scheme then the individual will be able to keep their fixed protection.

See below for more information on which transfers can be made without causing loss of fixed protection.

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Joining a new arrangement and keeping the fixed protection

FP 2012 - Paragraph 14(4) (d) and (10) Schedule 18 Finance Act 2011

FP 2014 - Paragraph 1(3) (d) & (9) Schedule 22 Finance Act 2013

FP 2016 - Paragraph 3(d) Schedule 4 Finance Act 2016

All fixed protections - Paragraph 12(2A) - (2C) Schedule 36 Finance Act 2004

If a member joins a new arrangement in a new, or their exisiting, registered pension scheme on or after:

  • 6 April 2012 for FP 2012,
  • 6 April 2014 for FP 2014, or
  • 6 April 2016 for FP 2016

they will keep their fixed protection if the reason for joining the new arrangement is:

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

PTM092410 explains what a retirement-benefit activities compliance exercise and an age-equality compliance exercise are.

If the member joins a new arrangement on or after:

  • 6 April 2012 for FP 2012,
  • 6 April 2014 for FP 2014, or
  • 6 April 2016 for FP 2016

for any other reason, the fixed protection will be lost at the point the new arrangement is made. This will be the case even though there can be no “benefit accrual” for the fixed protection’s purposes under the new arrangement (for example, where the arrangement provides defined benefit death benefits only).

A new arrangement is an arrangement that is new to the individual.  In other words 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 someone 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 person.

Where an individual starts to accrue a new type of benefit under the scheme after:

  • 5 April 2012 for FP 2012,
  • 5 April 2014 for FP 2014, or
  • 5 April 2016 for FP2016

this must be via a new arrangement. For example, a member being provided with only defined benefits under a scheme before 6 April 2016 but who then starts to build up money purchase (defined contribution) benefits will become a member of a new money purchase arrangement and so would lose FP 2016.

FP 2016 example (the same principle applies for FP but substitute 2012/2014 as appropriate for 2016)

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 2016 as the form of the benefits provided after 5 April 2016. For example a member of a defined benefits arrangement on 5 April 2016 has a new form of benefit provided after that date. These new benefits are also defined benefits and so do not have to be provided by a new arrangement. But even where the benefits provided after 5 April 2016 are the same as the type of benefits provided before 6 April 2016 a scheme may choose to provide the extra/new benefits via a new arrangement and if so, the creation of the new arrangement would lose FP 2016.

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Automatic enrolment 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 auto-enrol their employees into a pension scheme.

For any of the fixed protections, the considerations are the same as for enhanced protection - see PTM092420 under “Setting up a new arrangement - automatic or auto-enrolment”.

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Making contributions to an arrangement if the individual has any of the fixed protections

If an individual with any of the fixed protections, their employer or someone else (on their behalf) makes contributions to an other (i.e. non-cash balance) money purchase arrangement, the individual will lose their fixed protection.

They may be able to make further contributions to a defined benefits arrangement or cash balance arrangement. But the way that benefits are calculated for these types of arrangement may mean that there is benefit accrual if the member’s benefits increase by more than the relevant percentage. If that is the case, they will lose their protection.

See PTM093510 for more detail on when making contributions may lead to loss of fixed protection.

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Transfers that allow the member to keep their fixed protection

FP 2012 - Paragraph 14(4)(c) and (9) Schedule 18 Finance Act 2011

FP 2014 - Paragraph 1(3)(c) and (8) Schedule 22 Finance Act 2013

FP 2016 – Paragraphs 3(c) and paragraph 6 Schedule 4 Finance Act 2016

All fixed protections - Paragraph 12(7) - (8B) Schedule 36 Finance Act 2004

A transfer of rights for an ex-spouse to another scheme following a pension sharing order may still be made. Such a transfer does not affect the fixed protection of the individual whose rights are being reduced under the pension sharing order.

When transferring benefits, to keep fixed protection the transfer must be a permitted transfer. The following transfers are permitted transfers and will not cause loss of the fixed protection.

  1. A transfer of pension rights from an other (i.e. non-cash balance) money purchase arrangement to another other money purchase arrangement. The money purchase arrangement receiving the transfer must be held under either a registered pension scheme or a recognised overseas pension scheme.
  2. A transfer from a cash balance arrangement or defined benefits arrangement to an other money purchase arrangement (i.e. non-cash balance) under a registered pension scheme or a recognised overseas pension scheme. The value of the sums and assets received by the other money purchase arrangement must be actuarially equivalent to the rights being transferred, or
  3. A transfer from a cash balance arrangement or defined benefits arrangement to another defined benefits or cash balance arrangement if the transfer is made because:
  • the pension scheme making the transfer is winding-up (see below) and the receiving cash balance or defined benefits arrangement relates to the same employment as the transferring arrangement, or
  • the transfer is made because the individual’s employer has sold all or part of the business. The legislation refers to this as a relevant business transfer. PTM092410 explains the conditions that have to be met for a transfer be a relevant business transfer, or
  • the transfer is made as part of a retirement-benefit activities compliance exercise.  PTM092410 explains what a retirement-benefit activities compliance exercise is.

A transfer made in connection with a winding-up

To be a permitted transfer, a 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 unless there is evidence to the contrary. But where a decision to make a transfer occurs before the decision is taken to wind up the scheme, for example because the employer subsequent to the transfer decides to wind up the scheme in relation to the remaining members, then the transfer will not have been made in connection with the winding-up, although any other transfers made subsequent to the winding-up decision being taken may satisfy the condition.

Although not a requirement, it may be beneficial if the scheme administrator of the transferring scheme kept copies of any document evidencing that the intention to wind the scheme up pre-dated the decision to make the transfer.

When a pension scheme going into the Pension Protection Fund is treated as having been wound up by section 161(2) Pensions Act 2004, HMRC accept that this amounts to the winding up of the scheme.

The receiving arrangement must relate to the same employment

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 being 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.

Partial winding-up

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 requirements 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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Transfers that will cause an individual to lose their fixed protection

FP 2012 - Paragraph 14(4)(c) and (9) Schedule 18 Finance Act 2011

FP 2014 - Paragraph 1(3)(c) and (8) Schedule 22 Finance Act 2013

FP 2016 - Paragraphs 3(c) and 6 Schedule 4 Finance Act 2016

All fixed protections - Paragraph 12(7) - (8B) Schedule 36 Finance Act 2004

An individual will lose their fixed protection if a transfer is made:

  • to a scheme that is not a registered pension scheme or a recognised overseas pension scheme
  • from an other money purchase arrangement (i.e. non-cash balance) to either a cash balance arrangement or a defined benefits arrangement
  • from a cash balance or defined benefits arrangement to another cash balance or defined benefits arrangement where the transfer is not made because:
  1. the transferring scheme is winding up (see previous section), or
  2. the transfer is not made as part of a retirement-benefit activities compliance exercise or a relevant business transfer (see PTM092400).  In other words, their employer has sold all or part of their business and the member’s benefits are being transferred to their new employer’s scheme.

Impermissible transfers that will cause an individual to lose their fixed protection

FP 2012 - Paragraph 14(4)(b) and (8) Schedule 18 Finance Act 2011

FP2014 - Paragraph 1(3)(b) and (7) Schedule 22 Finance Act 2013

FP 2016 - Paragraphs 3(b) and paragraph  5 Schedule 4 Finance Act 2016

All fixed protections - Paragraph 17A Schedule 36 Finance Act 2004

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

The following are impermissible transfers into a money purchase arrangement that is not a cash balance arrangement (i.e. 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 2012 for FP 2012, 5 April 2014 for FP 2014 or 5 April 2016 for FP 2016, 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 (i.e. non-cash balance).

There is an impermissible transfer if at any time after 5 April 2012 for FP 2012, 5 April 2014 for FP 2014 or 5 April 2016 for FP 2016, a defined benefits arrangement or a cash balance arrangement for an individual becomes an other  money purchase arrangement (i.e. non-cash balance) for that individual under that scheme.