Transitional Protection

Question 1

Broadly, what is transitional protection?

Answer 1

These give the member a personal lifetime allowance, or protect rights up to a higher level than the standard LTA (particularly where pre A-day rights are protected) – protection has been offered in some form on each occasion the LTA has been reduced since A-day.

The purpose is to ensure members are not unfairly penalised for accruing benefits under previous LTA rules – protecting their existing rights from an LTA excess charge when the LTA is being reduced.

Question 2

What forms of transitional protection have been made available?

Answer 2

Enhanced Protection (2006)
Primary Protection (2006)
Fixed Protection (2012/14/16)
Individual Protection (2012/14/16)

Question 3

Describe Primary Protection?

Answer 3

This was available to individuals with pension rights (as at 5 April 2006) with a capital value in excess of £1.5m (the 06/07 LTA).

This provided protected individuals with a personal lifetime allowance (PLA). The percentage by which the member’s rights exceeded £1.5m is used to give the member a lifetime allowance enhancement factor (LAEF) – used to enhance the standard LTA applicable at the time the member crystallises their benefits, resulting in their PLA.

Due to continued reductions to the LTA, an underpinned LTA of £1.8m is used (the highest post A-day LTA). This underpinned LTA will be continued to use until such as time as the LTA increases to beyond this.

Question 4

How do you calculate the Primary Protection Lifetime Allowance Enhancement Factor?

Answer 4

(Value of benefits on 6 April 2006 LESS £1.5m)
DIVIDE BY
£1.5m

Question 5

How do you calculate the Primary Protection Personal Lifetime Allowance?

Answer 5

At date of BCE:

Underpinned LTA + (Underpinned LTA x LAEF)

Question 6

Describe Enhanced Protection?

Answer 6

This is a form of transitional protection that was made available at A-day to anyone, regardless of the value of their pension benefits. Provided the member remains eligible for Enhanced Protection, all benefits coming into payment after A-day will be exempt from the lifetime allowance charge.

Enhanced Protection will continue to apply provided the member accrues no further benefits under any registered pension scheme on or after A-day. This is known as relevant benefit accrual. A transfer of benefits to other schemes is permitted.

There are more complex rules for defined benefit schemes - calculations are carried out to determine whether revaluation of benefits has been excessive and would cause the loss of Enhanced Protection.

Question 7

Describe Fixed Protection?

Answer 7

This is a form of transitional protection made available in 2012 (£1.8m), 2014 (£1.5m) and 2016 (£1.25m). They have been made available as and when the Government has reduced the LTA and provided protection to the value of the LTA in the year prior to the reduction. Their LTA then being fixed at that amount.

Individuals can apply for Fixed Protection whether or not their pension benefits exceeded the existing LTA at the time of the reduction. However, they must not have any existing transitional protection.

To retain Fixed Protection there can be no further benefit accruals – protection is lost on the day benefit accrual occurs, which includes contributions to a defined contribution scheme or pension growth in a defined benefit scheme that exceeds a relevant pension.

You can hold Individual Protection at the same time as Fixed Protection, allowing reversion to Individual Protection in the event an individual wishes to make further contributions.

Question 8

Describe Individual Protection?

Answer 8

This is a form of transitional protection made available in 2012 (£1.8m), 2014 (£1.5m) and 2016 (£1.25m). They have been made available as and when the Government has reduced the LTA with reference to the LTA in the year prior to the reduction. Individual Protection provides the individual with an individual lifetime allowance equal to the capital value of their benefits up to the date of protection subject to a maximum cap - the reference LTA. Individual Protection allows accrual of further benefits without the risk of losing protection – a lifetime allowance charge would be due on benefits in excess of the individual lifetime allowance amount.

You can apply for Individual Protection if you do not have Primary Protection, and it will remain dormant while the holder has Enhanced Protection or Fixed Protection.