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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: benefit accrual: what is “benefit accrual”?

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)”.

Loss of fixed protection: what is “benefit accrual”
Difference between benefit accrual and relevant benefit accrual for enhanced protection
Benefit accrual under a money purchase arrangement that is not a cash balance arrangement
Benefit accrual under a cash balance arrangement
Benefit accrual under a defined benefits arrangement
Valuation assumptions for benefit accrual under a cash balance or defined benefits arrangement
Benefit accrual under a hybrid arrangement
Benefit accrual under an annuity contract
Benefit accrual under an arrangement for an individual who is a relieved member of a relieved non-UK pension scheme

Loss of fixed protection: what is “benefit accrual”

Fixed Protection (FP 2012) - Paragraph 14(4)(a), (4A) to (7) and (11) to (14D) Schedule 18 Finance Act 2011

Fixed Protection 2014 (FP 2014) - Paragraph 1(3)(a), (4) to (6) and (10) to (21) Schedule 22 Finance Act 2013

Fixed Protection 2016 - Paragraphs 3(a) and 4 Schedule 4 Finance Act 2016

If an individual has benefit accrual they lose their fixed protection on the day that benefit accrual occurs.

The rules for when benefit accrual occurs vary depending on which type of pension arrangement the member has. If a member has a number of pension arrangements and has benefit accrual under just one of them, they lose their fixed protection for all of their pension savings.

(PTM023000 gives further information about different arrangement types.)

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Difference between benefit accrual and relevant benefit accrual for enhanced protection

For other money purchase arrangements (i.e. non-cash balance) the tests are effectively the same for all of the fixed protections.

For defined benefits or cash balance arrangements, when applying the test for benefit accrual for any of the fixed protections, it is important to appreciate that this test is fundamentally different from that for relevant benefit accrual for enhanced protection.

For any of the fixed protections, the test for whether benefit accrual has occurred in a defined benefits or cash balance arrangement is an ongoing test in each tax year against any increases in the member’s prospective pension and lump sum rights.  So benefit accrual may occur at any time up to the time benefits are actually taken.

FP 2012 may be lost at any point in time after 5 April 2012 if benefit accrual occurs.

FP 2014 may be lost at any point in time after 5 April 2014 if benefit accrual occurs.

FP 2016 may be lost at any point in time after 5 April 2016 if benefit accrual occurs.

On the other hand, for enhanced protection the test for whether relevant benefit accrual has occurred in a defined benefits or cash balance arrangement is carried out:

  • at the time the benefits are actually taken or
  • when there is a permitted transfer from a defined benefits or cash balance arrangement to an other (i.e. non-cash balance) money purchase arrangement.

Enhanced protection may therefore only be lost at that fixed point in time.  For more information please see PTM092430.

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Benefit accrual under a money purchase arrangement that is not a cash balance arrangement

FP 2012 - Paragraph 14(4)(a), 14(5)(a) and (c) and 14(11) Schedule 18 Finance Act 2011

FP 2014 - Paragraph 1(3)(a), 1(4)(a) and (c) and 1(10) Schedule 22 Finance Act 2013

FP 2016 – Paragraph 4(1)(a) and (c) and 4(4) Schedule 4 Finance Act 2016

All fixed protections - Paragraph 14 Schedule 36 Finance Act 2004

For an other (i.e. non-cash balance) money purchase arrangement (or a hybrid arrangement where the benefits to be provided may be other money purchase benefits), benefit accrual happens if, on or after,

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

a relevant contribution is paid in respect of the member.

A relevant contribution is one of the following types of contribution:

  • a relievable pension contribution, i.e. a contribution paid by the member, or someone else other than the member’s employer, on behalf of the member. But the following contributions are not relievable contributions:

    • contracted-out rebates and minimum contributions paid into an other money purchase arrangement by HMRC in relation to contracted-out periods prior to 6 April 2012 for FP 2012, 6 April 2014 for FP 2014 and 6 April 2016 for FP 2016.
    • contributions paid by the member or someone else (other than their employer) in respect of the member after the member has reached age 75
    • life assurance premium contributions as per PTM044100.
  • a contribution paid by the member’s employer in respect of the member.
  • a contribution that is not paid by either the individual (or someone else on their behalf) or their employer but which is subsequently allocated to the member

The following do not trigger loss of the fixed protection:

  • Minimum payments under section 8 Chapter 48 of the Pension Schemes Act 1993 or section 4 Chapter 49 of the Pension Schemes (Northern Ireland) Act 1993 or any amount recovered under regulations made in connection therewith. Where such payments were being made before the 6 April date on which the fixed protection first became available they may continue.
  • Certain contributions that are used to provide life cover under a policy of insurance that existed before 6 April 2006 do not count as relevant contributions - see PTM044100.

The payment of compensation into an other (i.e. non-cash balance) money purchase arrangement after 5 April 2012 in the case of FP 2012, after 5 April 2014 in the case of FP 2014 and after 5 April 2016 in the case of FP 2016 after could be a relievable pension contribution and would trigger loss of protection. Whether it does depends on the nature of the compensation. PTM044100 explains when compensation is a relevant contribution that triggers loss of protection.

The normal rules apply for determining the day on which a contribution is paid when considering whether benefit accrual has occurred.

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Benefit accrual under a cash balance arrangement

FP 2012 - Paragraph 14(5)(c) and 6(a) Schedule 18 Finance Act 2011

FP 2014 - Paragraph 1(3)(a), (4)(b) and (5)(a) Schedule 22 Finance Act 2013

FP 2016 - Paragraph 4(1)(b) and (c), (2), (3) and  (5) to (8) Schedule 4Finance Act 2016

In a cash balance arrangement (or a hybrid arrangement where the benefits to be provided may be cash balance), the member’s rights under the arrangement should be tested to see if there has been an increase in the amount that would, on the valuation assumptions, be available for the provision of benefits.

If from 6 April 2012 for FP 2012, or 6 April 2014 for FP 2014 or 6 April 2016 for FP 2016, the increase in this amount is more than the ‘relevant percentage’ there has been benefit accrual and protection is lost.

See PTM093600 for more information about the relevant percentage.

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Benefit accrual under a defined benefits arrangement

FP 2012 - Paragraph 14(5)(b), 6(a) and (7) Schedule 18 Finance Act 2011

FP 2014 - Paragraph 1(3)(a), (4)(b), (5)(b) and (6) Schedule 22 Finance Act 2013

FP 2016 - Paragraph 4(1)(b) and (c), (2), (3) and  (5) to (8) Schedule 4 Finance Act 2016

To see if a member has had benefit accrual in a defined benefits arrangement (or hybrid arrangement where there may be defined benefits), the member’s rights under the arrangement should be tested to see if the increase in benefits amount is more than the ‘relevant percentage’.

If, from 6 April 2012 for FP 2012, 6 April 2014 for FP 2014 or 6 April 2016 for FP 2016, the increase in the benefits amount in any tax year is more than the ‘relevant percentage’ there has been benefit accrual and protection is lost (see PTM093600).

The benefits amount is:

(P x RVF) + LS

where

LS is the lump sum (other than by commutation of pension) that the member would be entitled to under the valuation assumptions

P is the annual rate of pension that the member would be entitled to under the valuation assumptions

RVF is the relevant valuation factor. The relevant valuation factor is 20 unless (exceptionally) a scheme has agreed a higher factor with HMRC.

For more information on benefit accrual in a defined benefits arrangement see PTM093520.

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Valuation assumptions for benefit accrual under a cash balance or defined benefits arrangement

Section 277 Finance Act 2004

When calculating whether there has been an increase in rights available for the provision of benefits in a cash balance arrangement or in the benefits amount for a defined benefits arrangement, the member’s rights are valued as the amount that the member would be entitled to receive on the date of the test, subject to two valuation assumptions.  These are that:

  • the benefit should be calculated assuming the individual to be the age at which no reduction would apply to the payment of an immediate benefit; and
  • the individual is deemed to be in good physical and mental health at the time of the test.

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Benefit accrual under a hybrid arrangement

FP 2012 - Paragraph 14(4A) to (4E) and (19) Schedule 18 Finance Act 2011

FP 2014 - Paragraph 1(3)(a), 4(c), 5(a), 5(b) & (6) Schedule 22 Finance Act 2013

FP 2016 - Paragraph 4(1)(c) and (2) to (8) Schedule 4 Finance Act 2016

For a hybrid arrangement, when and how benefit accrual occurs depends on the options available under the arrangement.

If one of the possible benefits that could be provided under the arrangement is an other (i.e. non-cash balance) money purchase benefit, benefit accrual occurs after 5 April 2012 for FP 2012, 5 April 2014 for FP 2014 or 5 April 2016 for FP 2016 on the earlier of:

  • the payment of a relevant contribution, or
  • an increase in benefits of more than the ‘relevant percentage’ (see PTM093600)

If the only possible benefits under the hybrid arrangement are defined benefits and cash balance benefits, benefit accrual occurs when benefits increase by more than the ‘relevant percentage’.

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Benefit accrual under an annuity contract

FP 2012 - Paragraph 14(13), (14), (14B) and 14(C) Schedule 18 Finance Act 2011

FP 2014 - Paragraph 1(3)(a) and (15) to (17) Schedule 22 Finance Act 2013

FP 2016 - Paragraph 4(1)(b) and (9) to (11) Schedule 4 Finance Act 2016

All fixed protections - Section 153(8) Finance Act 2004

The tax rules treat a deferred annuity contract (including what are commonly known as a section 32 policy, a buy out policy and an assigned policy) as a registered pension scheme where, on or after 6 April 2006, funds have been transferred to the contract/policy to secure benefits and those funds have come from a registered pension scheme. The deferred annuity contract automatically becomes a registered pension scheme on the day when the contract is made or a policy is assigned. See PTM031300.

As a result, when benefits are taken under the policy or contract there is a benefit crystallisation event (see PTM088000). So the benefits taken count for the purposes of the lifetime allowance just as they would have done had the individual remained in the original registered pension scheme.

Where an individual has any of the fixed protections and their pension rights include rights under one or more deferred annuity contracts, the value of those rights counts towards the lifetime allowance and is therefore covered by the fixed protections. But if there is benefit accrual in relation to the rights under the contract/policy, the fixed protection is lost.

Benefit accrual occurs in the same way as it would have done had the funds remained in the original pension scheme, so the above guidance on benefit accrual applies depending on the type of arrangement involved. Where the arrangement was defined benefits, the ‘relevant percentage’ is the higher of any annual rate of increase in the rights during the tax year which is specified in the contract (provided that this rate is no more than the percentage increase in the retail prices index over a 12-month period specified in the contract), and the relevant statutory increase percentage. If the member’s rights increase at a higher rate, there is benefit accrual and the fixed protection is lost.

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Benefit accrual under an arrangement for an individual who is a relieved member of a relieved non-UK pension scheme

FP 2012 - Paragraph 14(4A) to (4E) and (19) Schedule 18 Finance Act 2011

FP 2014 - Paragraph 1(18) to (21)) and (23) Schedule 22 Finance Act 2013

FP 2016 - Paragraph 8 Schedule 4 Finance Act 2016

All fixed protections – Paragraphs 13(3) and (4) and Paragraph 18 Schedule 34 Finance Act 2004

For an individual with any of the fixed protections who is a relieved member of a relieved non-UK pension scheme, from 6 April 2013 for FP 2012, 6 April for FP 2014 and 6 April 2016 for FP 2016, they are treated as though they were a member of a registered pension scheme.  Benefit accrual leading to the loss of the fixed protection can occur in relation to their arrangement(s) under the relieved non-UK scheme. See PTM113410 for definitions of a ‘relieved member’ and a ‘relieved non-UK pension scheme’. The test for benefit accrual in relation to such arrangements differs according to whether or not there has been a benefit crystallisation event (BCE) (see PTM088000) during the tax year.

Where there has not been a BCE during the tax year, there is benefit accrual if, in relation to the arrangement in the relieved non-UK pension scheme, there is a pension input amount under sections 230 to 237 Finance Act 2004 as applied by Schedule 34 of Finance Act 2004 greater than nil for any tax year. See PTM053000 for more detail about pension input amounts. Where this happens, benefit accrual is treated as occurring (and the fixed protection is lost) at the end of the tax year in question.

Where

  • there has been a BCE in relation to any arrangement for the individual under any pension scheme during the tax year, and
  • there would have been a pension input amount greater than nil in relation to the arrangement in the relieved non-UK pension scheme had that tax year ended immediately before the BCE took place,

there is benefit accrual and fixed protection is lost.  The benefit accrual is treated as having occurred immediately before the BCE occurs.  As the fixed protection has been lost before the BCE occurs, the standard lifetime allowance applying at the time of the BCE will apply instead of the protected lifetime allowance.