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6 min read 6 Oct 22
Primary protection was introduced by Finance Act 2004, for people with total benefits valued at £1.5m (the newly introduced lifetime allowance) or more on 5 April 2006, to reduce potential tax charges.
Primary protection was introduced by Finance Act 2004 to protect anyone who would exceed the newly introduced lifetime allowance from the full extent of lifetime allowance excess tax charges. This form of protection was available to anyone whose total benefits (crystallised and uncrystallised) from registered pension schemes on 5 April 2006 were valued as £1.5m or more (the lifetime allowance at 6 April 2006).
It was aimed at individuals:
It was also possible to have primary protection over tax-free cash. This is covered in our Tax-free cash and protection article.
Those who had applied for enhanced protection could also apply for primary protection if eligible. Where this applies, the primary protection is dormant and doesn’t apply to the individual unless and until the enhanced protection is lost or revoked. You can read more about this in our Enhanced protection article.
A member covered by primary protection has a personal lifetime allowance (LTA). This is calculated by a lifetime allowance enhancement factor (LAEF), which is added to the standard LTA. As such, the 'protected' or registered fund value is automatically indexed in line with the LTA.
The LAEF is calculated as:
(Value of individual's pension rights at 5 April 2006 - £1.5m) ÷ £1.5m
Example: (£1.7m - £1.5m) ÷ £1.5m = 0.13
Unlike enhanced protection, those with primary protection can suffer an LTA tax charge. This would apply to any benefits that crystallise in excess of the personal lifetime allowance.
With primary protection, the amount of protection increased in line with changes to the standard lifetime allowance.
However, when the LTA decreased to £1.5 million on 6 April 2012, members with primary protection retained the protected amount based on an underpinned LTA of £1.8m.
This is detailed in paragraph 2 (3), Schedule 18 of the Finance Act 2011 , which states the underpinned lifetime allowance is the greater of the current standard lifetime allowance and £1,800,000 (the standard lifetime allowance for the tax year 2011-12).
The personal lifetime allowance then applies upon a benefit crystallisation event (BCE). This is calculated by applying the LAEF to the underpinned lifetime allowance applicable at the BCE date and adding that to the underpinned lifetime allowance.
The formula to calculate the personal lifetime allowance at the BCE date is:
SLA + (SLA x LAEF)
BCE date: 20/08/2017
Underpinned LTA at BCE date: £1.8m
Personal lifetime allowance at BCE date: 1.8 + (0.13 x 1.8) = £2,034,000
So this member may crystallise benefits up to £2,034,000 before incurring any lifetime allowance charge.
Unlike enhanced protection, people with primary protection can continue to have contributions paid to their retirement plans and/or build up/accrue more benefits. There is no tax charge on funds below the level of their personal LTA. So, people with primary protection could continue to earn benefits after 5 April 2006, but if they have benefits greater than their personal LTA, the excess is subject to an LTA charge.
using the member in the example above:
Value of benefits crystallised in 2017/18 tax-year: £2.5m
Lifetime allowance charge due on the excess over personal lifetime allowance. LTA excess is £466,000
If the member did not have primary protection, the lifetime allowance charge would be due on £1,500,000. That is £2.5m less the standard lifetime allowance for tax year 2017/18 of £1m = £1.5m.
This means primary protection reduced the member's tax charge, but did not eradicate it completely.
Unlike enhanced protection, primary protection can’t be revoked. The only time primary protection may be lost is in the event of a pension debit.
Primary protection can be reduced or lost if a pension debit is applied to the member’s benefits, subsequent to a divorce after 5 April 2006. The individual's LAEF is recalculated to take into account the value of the benefits 'given up'.
The way this is done is to redo the factor calculation as it would have been had the debited amount not been included in the value at 5 April 2006 (even though this is not at the same date).
Taking the example from above:
(Value of individual's pension rights at 5 April 2006 - £1.5m) ÷ £1.5m
(£1.7m - £1.5m) ÷ £1.5m = 0.13
There is a pension debit of £100,000 in December 2012.
New factor is:
(£1.7m - £0.1m -£1.5m) ÷ £1.5m = 0.07
If the recalculated value of the member's benefits is higher than £1.5 million, then the LAEF is recalculated taking into account the reduced fund at 5 April 2006.
If the recalculated value of the member's benefits is lower than £1.5m, the member will lose primary protection and will revert to the standard lifetime allowance, as the factor would be 0.
It is the individual's responsibility to notify HMRC of the pension debit. A new certificate will be issued giving the details of the new LAEF or confirming that the member is entitled to the SLA, thus revoking the old certificate.
The Taxation of Pension Schemes (Transitional Provisions) Order 2006 modified sections of the Finance Act 2004 for any individual who has given notice to rely on primary protection, where:
In such circumstances, the value of the member's benefits at 5 April 2006 can include the value of relevant compensation for poorly performing investments (reduced appropriately in respect of 'other' pension benefits under a hybrid arrangement). The compensation is valued at the date of payment.
Article 10, The Taxation of Pension Schemes (Transitional Provisions) Order 2006/572
The Taxation of Pension Schemes (Transitional Provisions) Order 2006 modified the Finance Act 2004 for any individual who meets the following criteria:
The modifications prevent an individual qualifying for two lifetime allowance enhancement factors in respect of the same increase in benefits by applying for primary protection and a non-residence LTA enhancement factor.
See HMRC PTM095300 and
Statutory Instrument 2006/131 Regulations 7 – 16
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