Enhanced and Fixed Protection

Question 1

Under what circumstances might Relevant Benefit Accrual (RBA) be deemed to have occurred?

Answer 1

1. Money purchase scheme:
   
   • The payment of tax relievable contirbutions (including from 3rd parties) and compensation (which could include pension credit payments from divorce if paid into a new arrangement), but not including any contracting out rebates; if that happens, you lose EP.
2. Occupational pension scheme benefits:
   
   • The ‘RBA’ test compares the value of rights pre 5/4/06 with the value of the benefits 5/4/06 (at each BCE) and if the appropriate limit (after evaluation) is exceeded, EP is lost.
     In simple terms, the ‘appropriate limit’ can be defined as the value of the member’s pension rights at 5/4/06 increased by either 5% or RPI (per annum) up until the ‘first relevant event’ (normally a BCE or a transfer) after 5 April 2006.

DB TRANSFERS: The RBA test will also take place the point of transfer from a DB scheme. The CETV is measured against the RBA at the point of transfer.

Question 2

The indexation percentage for RBA is the highest of which three calculations?

Answer 2

1. the percentage increase in RPI
2. 5% a year
3. Statutory revaluation if this is higher (i.e. GMP fixed rate)

Question 3

Enhanced protection and still accrue benefits?

Answer 3

Yes, it is still possible to accrue benefits from a defined benefit final salary scheme. Eg. the NHS pension scheme, where there are still employees who have EP and are part of the NHS DB scheme.

Pension benefit for members with EP, are only tested against the appropriate limit at either a BCE or where there is a transfer - no other time. If the BCE value is within the appropriate limit test, enhanced protection continues to apply and no RBA is deemed.

DB benefits can continue to accrue and will only be tested at first BCE.

Question 4

Registered TFC (RTFC) and EP - how is this applied?

Answer 4

If the member’s TFC rights at Aday, are greater than £375,000 then these rights must also have been registred (with HMRC) when applying for enhanced protection.

Both protections must have been registered for (fund and TFC) for BOTH to apply.

RTFC defined the % of TFC that can be taken from the fund. WIth EP, they are registered as a TFC percentage (%):

RTFC 16.67% registered (£500,000/£3m x 100%).

Fund now worth £5m and able to take a tax free lump sum of up to 16.67% (£833,500).

Question 5

No registered TFC with EP?

Answer 5

Individuals with enhanced protection, but no RTFC will retain a right to a tax free lump sum of up to 25 percent of £1.5milllion. Even with the SLTA reduction.

Max TFC allowed is the lower of:

• 25% of the crystallised value of the benefits being taken; and
• 25% of £1.5m less the revalued amount of any previously crystallised benefits

Assuming no scheme specific tax-free cash protection.

Question 6

Death benefits and EP

Answer 6

From 2015/16 uncrystallised/ crystallised money purchase pension funds can be paid without incurring any change to EP rights or LTA tax charge (including certain insured life cover) - full EP is retained, even on death.

However, as with any DB pension scheme with EP providing LTA protection, it has to be tested for any RBA against the appropriate limit at death. (death is a BCE; it is BCE 7)

Question 7

Pension life cover and enhanced protection?

Answer 7

Contributions/ premiums to MP pension schemes had to stop after 05/04/2006 to retain enhanced protection. But, they could have continued, if they are used to fund life insurance only and it started before 6 April 2006 and without significant variation since.

Question 8

Losing EP - divorce:

Answer 8

• Pension credit and losing EP
  
  • Where an individual receives a pension credit as a result of pension sharing they could lose EP as a result, if the pension credit is paid into a new arrangement.
  • Any accrual in any new money purchase pension scheme will result in loss of EP; including where the individual enhanced protection will be lost due to the setting up of a new arrangement.
  • If a pension credit is paid into an existing DB scheme or cash balance arrangementm EP may be lost at a later date if/ when relevant benefit accrual arises and the appropriate limit test fails.

Question 9

Retaining EP - divorce:

Answer 9

• Pension credit and retaining EP
  
  • If the pension credit is paid into the member’s existing money purchase arrangement, the member will not lose enhanced protection as a result of receiving the pension credit.
  • This money purchase arrangement must be already set up before registering for EP.

EP is not affected by a pension debit, however the ability to rebuild pension benefits will be vastly limited.

Question 10

Previous BCE’s and then EP is lost/ revoked?

Answer 10

Throughout all this (for members with EP), there’s no retrospective LTA 55% tax charge if the EP is subsequently lost, and benefits (BCE) were previously taken in good faith, accurately and with a valid certificate, whilst their EP was in place and was higher than the standard LTA at the time.

Question 11

What is fixed protection?

Answer 11

Fixed protection (FP) maintains the lifetime allowance at a certain level depending on what type the individual has. There are three different versions:

• Fixed Protection 2012 £1.8million (applications finished 5 April 2012)
• Fixed Protection 2014 £1.5million (applications finished 5 April 2014)
• Fixed Protection 2016 £1.25million (still available to apply for)

Question 12

What are the restrictions on applying for fixed protection 2016? (4)

Answer 12

• Primary protection.
• Enhanced protection.
• Any earlier version of fixed protection, for example you can’t apply for fixed protect 2016 if you had either fixed protection 2012 or 2014.
• Unlike individual protection there is no minimum benefit value needed to apply for fixed protection.

Question 13

How can fixed protection be lost? (5)

Answer 13

• starting a new arrangement other than to accept a transfer of existing pension rights
• making further contributions (money purchase)
• having further benefit accrual (defined benefit)
• breaking the transfer restrictions (explained below)

Fixed protection can also be lost if the lifetime allowance subsequently increases to more than the protected amount. The individual’s lifetime allowance will then be the higher lifetime allowance.

It is possible to have both fixed and individual protection.

Question 14

What counts as benefit accrual (fixed protection) for a money purchase arrangement (other than cash balance benefits)? What exceptions are allowed?

Answer 14

This includes all personal contributions, employer contributions and contributions paid by other people on the individual’s behalf.

The exceptions to the ‘no contributions rule’ are:

• Contributions may continue to a life assurance policy providing death benefits which do not attract tax relief.
• National Insurance rebates paid to the scheme will not cause the loss of fixed protection.
• Contributions paid by the individual or someone else (other than their employer) in respect of the individual after they have reached age 75.

Question 15

Benefit accrual within defined benefit and cash balance arrangements - fixed protections?:

Answer 15

For defined benefits or cash balance arrangements benefit accrual will occur if in any tax year the value of the pension rights over the tax year have gone up by more than the ‘relevant percentage’, which is:

• An annual rate used to increase benefits and which was specified in the scheme’s rules:
  
  • on 9 December 2010 for FP 2012, or
  • on 11 December 2012 for FP 2014, or
  • 9 December 2015 for FP 2016, or
  • the highest percentage so specified for an arrangement where there is more than one arrangement and they have different annual rates.
  • Plus the relevant statutory increase percentage.

Question 16

Transfers and fixed protection - under what conditions can FP be retained?

Answer 16

• Money purchase
  
  • Can only be transferred to another money purchase arrangement under a registered pension scheme.
• Defined benefits and cash balance benefits
  
  • Can be transferred to
    
    • a money purchase arrangement under a registered pension scheme
    • another cash balance arrangement if the transfer is made because:
    • the pension scheme making the transfer is winding up or
    • the employer has sold all or part of their business and the benefits are being transferred to the new employer’s scheme.
    • it is made as part of a retirement benefit activities compiance exercise.

Question 17

How can an individual apply for fixed protection?

Answer 17

• Any individual who wishes to apply for lifetime allowance protection has to do so online.
• The individual will need an HMRC Online Services Account, if they do not already have one they will have to create an account.
• Details of their lifetime allowance protections will be held on their online account.
• Individuals will no longer receive paper certificates with their lifetime allowance protection details.
• There is no deadline for applying for FP16 and IP16.

Question 18

Will a deferred member of a defined benefits scheme lose fixed protection 2016 if the deferred pension increases?

Answer 18

Not unless it increases by more than an amount specified in the scheme rules. This would have to have been in the scheme rules on 9 December 2015. If no amount is specified protection won’t be lost if the increase is no more than the percentage increase in CPI at September of the previous year.