Pension Fixed Protection explained

At each reduction of the Lifetime Allowance (LTA), a further level of Fixed Protection was introduced.

If an individual already had primary or enhanced protection they are not eligible to apply for fixed protection. It was possible to revoke enhanced protection and apply for fixed protection. Primary protection cannot be revoked. Therefore, fixed protection was not available for those with existing primary protection. If an individual already has a version of fixed protection in place, they cannot apply for subsequent levels of fixed protection.

Fixed protection was aimed at anyone, without existing LTA protection, who expected their fund to be in excess of the reduced standard LTA at the point they vest their benefits (although they do not need to be in excess of the LTA at the point of application, or the date the LTA reduction applies), if they are:

• in a Defined Benefit or Cash Balance scheme and will not accrue benefits above a specified level; or
  
  
• in a money purchase scheme if no contributions will be paid after 5 April 2012 (FP12), 5 April 2014 (FP14), or 5th April 2016 (FP16).

The conditions for an individual to keep Fixed Protection are that they:

• cannot start a new arrangement under a registered pension scheme other than to accept a transfer of existing pension rights,
  
  
• cannot have benefit accrual, and
  
  
• will be subject to restrictions on where and how they can transfer benefits.

If the individual breaches one of these conditions, they will lose their Fixed Protection. The individual must tell HMRC if they lose Fixed Protection.

If fixed protection has been lost then it is the individual's responsibility to inform HMRC. The member must do this within 90 days of the loss of Fixed Protection. If the member does not do this HMRC may issue a penalty of up to £300 for failure to notify and additional daily penalties of £60 per day after the initial penalty is raised.

New arrangements

As mentioned above, a new arrangement would cause the loss of Fixed Protection unless specifically allowed by legislation.

If a member joins a new arrangement on or after:

• 6 April 2012 for FP12, or
  
  
• 6 April 2014 for FP14, or
  
  
• 6 April 2016 for FP16

they will keep 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 the relevant date for any other reason, Fixed Protection will be lost at the point the new arrangement is made. This will be the case even though there may be no “benefit accrual” under the new arrangement (for example, where the arrangement provides death benefits only).

Pension Tax Manual - PTM093400

Benefit Accrual: Defined Benefit Schemes

The calculation of benefit accrual for defined benefit schemes for Fixed Protection is fundamentally different than the calculation for Enhanced Protection.

Accrual is limited to CPI increases or the rate of increase under the scheme rules at 9 December 2010 for FP2012, or 11 December 2012 for FP14, or 9 December 2015 for FP 2016. The increase stated in the scheme rules does not have to be a percentage amount but could be an increase which would allow a percentage to be calculated. This is covered in detail in Pension Schemes Newsletter 50 and HMRC Pension Tax Manual - PTM093600.

For FP16 accrual is limited to the higher of the following:

the sum of the rate of increase under the scheme rules at 9 December 2015* and the relevant statutory increase, or

the higher of the CPI increases (the percentage by which the consumer price index for the month of September in the previous tax year is higher than it was for the September before that- or 0% if it is not higher) or the relevant statutory increase.

* - the increase stated in the scheme rules does not have to be a percentage amount but could be an increase which would allow a percentage to be calculated.

FP 2016 - Paragraph 4(8) Schedule 4 Finance Act 2016

An increase to a pension in payment is not benefit accrual.

One of the fundamental differences is that, Enhanced Protection has benefit accrual tested at the crystallisation of a defined benefit scheme i.e. when actual entitlement has arisen, for Fixed Protection it is an ongoing test and benefit accrual is triggered by an increase in prospective benefits over and above the limit outlined above.

Benefit Accrual: Money purchase schemes

No contributions can be made by the member, their employer or anyone else. There are exceptions for contributions to a life assurance policy providing death benefits which began before 6 April 2006 and National Insurance rebates.

Pension Tax Manual - PTM093510

Transfers

To avoid losing Fixed Protection, transfers can only be made from a money purchase to a money purchase scheme or from a defined benefit scheme or cash balance arrangement to a money purchase scheme. The transfer value received by the money purchase scheme must be actuarially equivalent to the rights being transferred. An enhanced transfer value would not meet this condition. Any receiving scheme must be a registered pension scheme or a qualifying recognised overseas pension scheme (QROPS).

A member will lose Fixed Protection if they transfer;

• to an unregistered pension scheme or an overseas pension scheme which is not a QROPS
  
  
• from a money purchase to a defined benefits or cash balance arrangement; or
  
  
• from a defined benefit or cash balance arrangement to another defined benefit or cash balance arrangement unless the transfer is due to the transferring scheme winding up or if a member's employer has sold all or part of the business and benefits are being transferred to a new employer's scheme.

A member will not lose Fixed Protection if they are subsequently subject to a pension debit. However, they will not be able to rebuild any pension fund without revoking Fixed Protection as defined benefit accrual and money purchase contributions are not permitted.

The recipient of the pension credit will not lose their Fixed Protection as long as the funds are transferred to an existing money purchase arrangement. If a pension credit is received into a defined benefit or cash balance arrangement then it is probable that this would cause benefit accrual and therefore Fixed Protection would be lost.

The creation of a new arrangement to receive a pension credit would trigger the loss as the purpose of the arrangement would not be to receive a permitted transfer.

When the member wants to take benefits then they must tell the scheme administrator that they have Fixed Protection. The legal minimum requirement is for the member to give the scheme administrator the certificate reference although often the provider will require the member to send a copy of the fixed protection certificate for FP12 and FP14 . There are no certificates for FP16 due to the fact that it is an online system.

The scheme administrator is required to notify HMRC where Fixed Protection has mitigated or negated a lifetime allowance charge so are likely to require details of all pension savings, even if they are not vesting all benefits.

This is calculated by dividing the amount being vested by £1.8 million in the case of FP12 and multiplying by 100 to find the percentage. For example if a client vests £600,000 while in receipt of FP12 - £600,000/1,800,000 x 100 = 33.33%. This means that the member still has 66.67% of their fixed protection LTA available.

For FP14, this is calculated by dividing the amount being vested by £1.5 million. If the client vests £600,000 while in receipt of FP14 - £600,000/1,500,000 x 100 = 40.00%. This means the member still has 60.00% of their fixed protection 2014 LTA available.

For FP16, this is calculated by dividing the amount being vested by £1.25 million. If the client vests £600,000 while in receipt of FP16 - £600,000/1,250,000 x 100 = 48.00%. This means the member still has 52.00% of their fixed protection 2016 LTA available.

The concept of auto-enrolment was introduced in the Pensions Act 2008. The first employees were auto-enrolled in October 2012. If an employee has fixed protection and they are auto-enrolled then they will have to opt out within the one month opt out period or else they will lose fixed protection. With effect from April 2015 the Department for Work and Pensions introduced technical changes to auto-enrolment legislation listing four new exceptions that modify some of the employer duties where a worker meets specific conditions - one of which is where the employer has reasonable grounds to believe that the worker has Enhanced or fixed protection on pension savings under HMRC rules. This allows auto-enrolment to become optional and not compulsory. It is the employee’s responsibility to inform the employer if they have protections. It will be a matter for the employer to decide whether or not to exercise the discretion not to auto-enrol or re-enrol the jobholder and to decide what is reasonable grounds to believe the jobholder has enhanced protection, fixed protection 12, 14 or 16. A copy of the HMRC certificate, or print out from an individual’s HMRC online services account is a couple of ways to demonstrate reasonable grounds.

Section 14 of Schedule 18 Part 2 Finance Act 2011

The legislation for Individual Protection (2014 and 2016) provides for both protections to be held (restricted to one of each for IP and FP). In this case, the IP will act as dormant protection in the event that FP is lost. This will prevent a fall in LTA from as much as £1.8 million to the standard Lifetime Allowance and instead provide a personal lifetime allowance based on the value of pension savings at 5 April 2014 (capped at £1.5m), or 5 April 2016 (capped at £1.25m) as relevant. Individual Protection would then allow further contributions to be made as this is permitted under IP14 and 16 - please refer to our article on Individual Protection 2014 and 2016.

Schedule 6, Part 1 of Finance Act 2014

Further information

Pension Tax Manual - PTM093000- provides full details of FP12, FP14 and FP16.