Enhanced Protection was introduced by Finance Act 2004 alongside the introduction of the Lifetime Allowance. The protection carried over into the current pension regime after the abolition of the LTA on 6th April 2024.
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What is Enhanced Protection?
Enhanced Protection was introduced for people who, at 5 April 2006, expected their pension benefits to be over the newly introduced lifetime allowance (LTA) when they intended to take them and wanted to avoid an LTA excess charge.
Anyone could apply for Enhanced Protection, regardless of the value of their funds, until 5 April 2009. Assuming they kept their protection, and did not lose it, it had the effect of eliminating any lifetime allowance charge. Effectively a member could take an unlimited amount from their pension arrangements after April 2006.
All pension funding and accrual had to stop.
Lump sum rights at 5th April 2006 that were in excess of £375,000 were also protected under Enhanced Protection and was delivered as a percentage amount the individual could take.
The Spring Budget 2023 announced the abolition of the LTA from 6th April 2024.
Enhanced Protection continues into the new pension regime. It effects the amount and usage of an individuals Lump Sum Allowance and Lump Sum and Death Benefit Allowance. It is also impacts the tax treatment and availability of certain lump sums.
As part of the abolition of the LTA anyone who applied and held Enhanced Protection as at 15th March 2023 could no longer lose their protection with effect from 6th April 2023. Since then it has been possible to make contributions and accrue benefits without losing the protection.
It also means those with protection will suffer tax when benefits taken exceed the limits.
An explanation of Enhanced Protection can be found in HMRCs Pension Tax Manual at PTM17440 and PTM176340.
Enhanced Protection and the Lump Sum Allowance (LSA).
Enhanced Protection impacts the LSA available to an individual. The impact is different depending on whether there is also protection of lump sum rights.
No protection of lump sum rights
The LSA for the individual is £375,000. The calculation of tax free amounts available when a lump sum is paid work in the same manner as someone without protection.
The standard transitional rules apply to take account of benefits paid before 6th April 2024. A Transitional Tax Free Amount Certificate could be applied for to reduce the LSA usage from the standard basis.
Example
Sandi has Enhanced Protecton with no lump sum protection.
She had previously used 40% of the LTA, taking £200,000 as tax free cash.
She therefore has an LSA deduction of £375,000 x 40% = £150,000.
Her initial LSA is £375,000 - £150,000 = £225,000.
As her standard transitional deduction is lower than the actual tax free amounts previously paid she does not apply for a TTFAC.
Lump sum rights protected
The standard transitional rules DO NOT apply to those with enhanced protection and protected lump sum rights. The individual is not eligible to apply for a Transitional Tax Free Amount Certificate.
The maximum tax free amount payable from any arrangement is:
(i) the maximum amount of a pension commencement lump sum that could have been paid to the individual on 5 April 2023 under the arrangement
less
(ii) the aggregate of the amounts of any pension commencement lump sums to which the member has previously become entitled under that arrangement after that date.
Example
Jeff has Enhanced Protection.
He had lump sum rights in excess of £375,000 on 5th April 2006 and his certificate shows 20%.
On the 5th April 2023 he had a SIPP with uncrystallised rights of £500,000. It is currently valued at £600,000.
Jeff has a LSA of £500,000 x 20% = £100,000.
He part crystallised £100,000 on 10th May 2024.
His LSA was reduced by £100,000 x 20% £20,000 leaving an LSA of £80,000 for future RBCEs.
Enhanced Protection and the Lump Sum and Death Benefit Allowance (LSDBA).
Enhanced Protection impacts the LSDBA available to an individual. The impact is the same whether or not there is also protection of lump sum rights.
The LSDBA is effectively the value of the individual's uncrystallised rights as at 5th April 2024.
The LSDBA is not subject to the standard transitional deduction. A TTFAC could be applied for in respect of the LSA but any lump sum and death benefit transitional amount would be ignored.
Interaction with Relevant Lump Sums.
The tax treatment of lump sums paid to the individual can be different to the standard rules where Enhanced Protection is held.
| Uncrystallised Funds Pension Lump Sums |
|---|
| Cannot be paid if lump sum protection applies. |
| No tax free amount is allowed if the individual previously took a Serious Ill Health Lump Sum. |
| The tax free limit is the amount that could have been paid tax free from the arrangement on payment of an UFPLS on 5th April 2024. |
| LSA and LSDBA are reduced by tax free amount paid. |
| Pension Commencement Lump Sum |
| Tax free amounts are driven by LSA as described above. |
| LSA & LSDBA are reduced by tax free amounts paid. |
| PCLS is not payable if individual previously took a Serious Ill Health Lump Sum. |
| Scheme Specific Protected Tax Free Cash (SSPTFC) |
| Can only be paid where enhanced tax fee cash protection does not apply. |
| Where payable SSPTFC operates under standard SSPTFC rules. |
| LSA is reduced by 25% of amount crystallised. |
| LSDBA reduced by 100% amount paid tax free. |
| Standalone Lump Sum |
| Cannot be paid if there are protected lump sum rights with percentage below 100% |
| If there is 100% cash protection then maximum tax free is the amount payable as at 5th April 2023 |
Where no lump sum protection the tax free limit is the lower of: (i) the amount that could have been paid on 5th April 2023 without liability to income tax, and (ii) the members available lump sum and death benefit allowance. |
| LSA and LSDBA are reduced by the total tax free amount paid. |
| Serious Ill Health Lump Sum (SIHLS) |
| Where entitlement to a SIHLS arises then the tax free amount of PCLS and UFPLS is set to Nil. |
| LSDBA is reduced by amount paid |
| Tax free amount is limited to the maximum amount that could have been paid to the individual on 5 April 2024 under the arrangement. For a DB arrangement it is the "appropriate limit". |
Interaction with Relevant Lump Sum Death Benefits.
The maximum amount of death benefits that can be paid tax free from an arrangement where enhanced protection applies is broadly the same for all relevant lump sum death benefits.
The amount that can be paid tax free is:
(a) the maximum amount of the relevant lump sum death benefit that could have been paid in respect of the individual on 5 April 2024 , less
(b) the aggregate of each authorised lump sum death benefit (if any) previously paid in respect of the individual under that arrangement after that date that was not subject to income tax.
If the above calculation produces a negative result then it is nil.
In the case of benefits from a DB arrangement the maximum amount as at 5th April 2024 is the "appropriate limit".
Losing enhanced protection
As explained above, it was possible to lose Enhanced Protection if certain events happened between 5th April 2006 and 6th April 2023.
From 6th April 2023 anyone who had applied for the protection prior to 15 March 2023, almost everyone, would not lose the protection in the way they previously could have. It is theoretically possible that someone could apply late for Enhanced Protection and they could lose it in the same way as was possible prior to 6th April 2023.
Enhanced protection could be, or in the case of events prior to 6th April 2023 would have, been lost:
- if there is benefit accrual which exceeds the permitted limit defined as relevant benefit accrual
- if contributions are made to any defined contribution arrangement (including any employer / third party contributions - further details below of some exceptions to this rule)
- if a new arrangement is set up for the member (except in the case of certain transfers)
- if certain "non-permitted" transfers were made.
More detailed explanations of the above are available in HMRCs Pension Tax Manual PTM176340.
The member must inform HMRC if they lose enhanced protection. They must do this within 90 days, or they are liable to a penalty of up to £3,000.
Alternatively, the member can notify HMRC that they no longer wish to rely on enhanced protection (The Registered Pension Schemes (Enhanced Lifetime Allowance) Regulations 2006).
When enhanced protection is/was lost:
- any subsequent benefit crystallisation events (BCE's) that exceeded the standard LTA would have been subject to a lifetime allowance charge
- the availability of LSA & LSDBA would be based on standard rules unless another protection applied
- any future RBCEs will be subject to the standard rules unless another protection applies
- if the member also has dormant primary protection, ie they held both protections, they would revert to primary protection
- if the member has Individual Protection 2014 (IP14) or intends to apply for Individual Protection 2016 (IP16) this would act as dormant protection, so on the loss of enhanced protection they would revert to IP14 or IP16
- any future tax-free amounts would be based on the standard rules.
Any earlier events that occurred with the benefit of enhanced protection do not need to be revisited.
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Lump Sum Allowance (LSA)
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Lump Sum and Death Benefit Allowance (LSDBA)
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Transitional Tax Free Amount Certificates (TTFAC)
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