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The three versions of fixed protection

The lifetime allowance (LTA) has been reduced on three occasions. Each time, a version of fixed protection has been made available to help people who had pension rights that already exceeded, or are likely to exceed, the reduced LTA. It provided valuable protection against LTA tax charges and could also give a higher tax free cash entitlement.

The Spring Budget 2023 announced that the intention is to abolish the LTA from 6 April 2024 and that LTA tax charges will not apply for tax year 2023/24. It also announced the removal of some restrictions for those with fixed protection.

However, the announcement about the LTA and LTA tax charges does not mean that fixed protection is no longer valid – it’s still relevant for the purposes of calculating the tax free cash rights and the taxation of certain lump sum payments.

* Fixed protection is maintained until such time, if ever, it is lost.

The trade-off was that:

• there could be no ongoing contributions or ‘benefit accrual’
• you couldn't start a new pension arrangement other than to accept a transfer of existing pension rights
• there were some restrictions on pension transfers

However, these restrictions no longer apply from 6 April 2023, for individuals who registered fixed protection by 15 March 2023 and had not invalidated or revoked it before 6 April 2023.

Eligibility

Regardless of fund size or benefit value, you can apply for fixed protection as long as you don’t have enhanced protection, primary protection or an earlier version of fixed protection.

Fixed protection 2016 is still available, but previous versions are no longer available.

It’s aimed at those whose pension benefits will, or are likely to, exceed the LTA when benefits are taken. As LTA tax charges no longer apply from 6 April 2023, the remaining value of this protection is that it can still produce higher tax free cash rights.

Applying for fixed protection

Applications for FP2016 are made online (a Government Gateway account is required) and there is no deadline. The form can be found here.

If successful, FP2016 will apply retrospectively from 6 April 2016, regardless of when it's granted.

However, while applications for FP2016 can still be made, protection granted by an application made on or after 15 March 2023 will not allow new contributions to be made from 6 April 2023 without the protection being lost. See below for further details.

A protection reference number is given in the response to an application. This should be given to the individual’s pension scheme if relying on FP2016 when taking benefits.

It’s no longer possible to register for the earlier versions of fixed protection. The deadlines for these were 5 April 2012 (FP2012) and 5 April 2014 (FP2014).

Those who registered for FP2012 or FP2014 should have received a certificate from HMRC confirming the protection. It includes a reference number, which should be given to the individual's pension scheme if relying on the protection when taking benefits.

For all protections, you can check your reference number online by signing into your Government Gateway account.

If someone dies without having applied for FP2016, their personal representatives can still make an application if the deceased met the qualifying criteria.

Taking benefits

Before taking benefits (or reaching age 75), the pension provider or trustees should be given a note of the protection reference number so they know that fixed protection applies. Without this, benefits would be tested against the standard LTA.

Although there will no longer be LTA tax charges from 6 April 2023 and the LTA is to be abolished from 6 April 2024, the protection is still relevant for tax free cash purposes.

Tax free cash of up to 25% of the value of the crystallised benefits can normally be taken, so long as it doesn't exceed 25% of the available protected LTA (or the standard LTA if it ever goes above the protected LTA).

In some circumstances the tax free cash could be more or less than 25%. For example, if the person has scheme specific tax free cash protection above 25%, or where tax free cash is limited because there’s a large GMP liability.

If benefits above the available LTA were taken before 6 April 2023, an LTA tax charge applied. 

Benefits taken after 5 April 2016 but before registering for FP2016

If there have been any benefit crystallisation events (BCEs) on or after 6 April 2016, but before the individual registered for FP2016, the amount of LTA used up should be recalculated. This is because FP2016 is backdated to 6 April 2016, regardless of when it’s granted.

The benefit to the individual is that testing against a higher LTA will mean that a lower percentage of the LTA will have been used up by any such BCE, leaving more LTA available for later BCEs (unless fully used up).

In such circumstances the individual should ask their pension provider or trustees to redo the calculations, quoting their protection reference number.

Losing fixed protection

Before 6 April 2023

Fixed protection was normally lost if:

• contributions were made to a defined contribution scheme
• there was ‘benefit accrual’ under a defined benefit scheme
• the individual became a member of a new pension arrangement (unless it was a transfer of your existing rights) or
• the individual made or received certain types of pension transfer (see below)

It's the member's responsibility to tell HMRC if fixed protection is lost. The member must do this within 90 days of the day on which they could have reasonably been expected to have known they had lost their protection. If the member does not do this, then they can be liable to an initial penalty of up to £300 for failure to notify and daily penalties of up to £60 per day thereafter. 

If fixed protection is lost, the individual will revert back to the standard LTA, unless they also had, or subsequently registered for, individual protection.

From 6 April 2023

Those who had registered for fixed protection by 15 March 2023 (and who didn’t invalidate or revoke it before 6 April 2023) cannot lose their protection. They can now recommence pension funding, make transfers and start new arrangements without fear of invalidating the protection.

Those who registered fixed protection after 15 March 2023 can still lose their protection - the old rules continue to apply.

Benefit accrual

Before 6 April 2023, a condition of maintaining fixed protection is that there was no ‘benefit accrual’ after 5 April 2012 (FP2012), 5 April 2014 (FP2014) or 5 April 2016 (FP2016).

From 6 April 2023, this no longer applies to individuals who registered for fixed protection by 15 March 2023 and didn’t invalidate or revoke it before 6 April 2023 – they can recommence pension funding without losing their protection. This also gives them the potential to carry forward unused annual allowance from the three tax years before 2023/24 when they were unable to fund their pensions.

However, those who registered fixed protection after 15 March 2023 will lose their protection if they have ‘benefit accrual’.

What 'benefit accrual' actually means depends on the type of scheme involved.

• Defined contribution (DC) schemes - this normally means no contributions can be paid.
  
  The main exception to this rule is contributions to provide life cover under arrangements in place before 6 April 2006.
  
  
• Defined benefit (DB) or cash balance schemes - it means the benefit value can't increase by more than the ‘relevant percentage’ in any tax year.
  
  The benefit value is 20 x the accrued pension plus any separate tax free cash.

Benefit accrual can occur for active and deferred members of DB schemes, but once a DB scheme pension is in payment, an increase to the pension won't be classed as benefit accrual - though it could use up additional lifetime allowance through benefit crystallisation event 3.

The relevant percentage

For many DB scheme members, particularly active members, the relevant percentage will be the higher of:

• any annual increase in CPI (using the September CPI figure from the previous year)
• the relevant statutory increase percentage - this covers statutory increases such as GMP revaluation or revaluation of accrued rights for early leavers

Some schemes include an annual rate of benefit increase within the schemes rules to cover certain situations - such as:

• preserved benefit increases for deferred members
• benefit increases for late retirement
• career average earnings schemes which usually specify an annual uprating percentage for accrued benefits or previous years' pensionable earnings

For members covered by such increases, the relevant percentage will be;

• the annual rate of benefit increase specified in the scheme's rules on:
  
  
  • 9 December 2010 (FP2012)
  • 11 December 2012 (FP2014)
  • 9 December 2015 (FP2016)
  plus the relevant statutory increase percentage.

Contributions to an arrangement in place before 6 April 2012 (FP2012), 6 April 2014 (FP2014) or 6 April 2016 (FP2016) to provide life cover on a DB basis (e.g. a lump sum death benefit of 4 x final salary) is not benefit accrual and won't affect fixed protection. 

Fixed protection and transfers

Individuals who registered fixed protection by 15 March 2023 and still held it on 6 April 2023 can transfer their pensions from 6 April 2023 without fear of losing their protection.

But individuals who register fixed protection after 15 March 2023 can sometimes lose their protection on transfer - care is needed for certain types of transfer, including pension sharing on divorce.

Transfers that don’t affect fixed protection

The following transfers will not affect fixed protection so long as the receiving scheme is either a registered pension scheme or a QROPS.

• DC to DC
• DB or cash balance to DC, unless the transfer payment is not the actuarial value of the pension rights being transferred - for example, where an enhanced transfer is given

Transfers that would result in a loss of fixed protection

• DC to DB or cash balance
• To an unregistered pension scheme or an overseas scheme which is not a QROPS
• DB to DC if the transfer payment is not the actuarial value of the pension rights being transferred – for example, where an enhanced transfer is given
• DB or cash balance to DB or cash balance - unless the transferring scheme is being wound up and the receiving scheme is for the same employment, or the benefits are being transferred as part of a relevant business transfer
• A transfer as a result of a pension sharing order, where a new arrangement is set up to receive pension credit rights directly from the original member's pension.

A transfer from a scheme that’s not a UK registered pension scheme doesn't, in itself, result in the loss of fixed protection. But if a new arrangement is set up to accept the transfer, then fixed protection is lost.

Pension sharing and fixed protection

Fixed protection is not affected if someone becomes subject to a pension debit under pension sharing. But, of course, they can’t rebuild their pension benefits without losing the protection.

Care is needed when giving advice on securing pension credit rights for someone with fixed protection:

• If a new arrangement is set up to accept the pension credit directly from the original member's pension, fixed protection is lost
• But if it’s paid into an existing pension arrangement, fixed protection is not affected. After that, the pension credit rights can normally be transferred to a new arrangement without affecting the protection

Fixed protection and auto-enrolment

Whilst pension funding from 6 April 2023 is no longer an issue for many with fixed protection, those who registered fixed protection after 15 March 2023 still need to be aware that their protection could be lost as a result of an employer auto-enrolling (or auto-re-enrolling) them into a pension scheme - this is particularly relevant when moving to a new employer.

Employers don't have to auto-enrol or auto-re-enrol anyone who they have 'reasonable grounds to believe' has LTA protection. Those with fixed protection should let their employers know as soon as possible.

But even then, the employer is not obliged to treat them differently - it's optional - so these employees may still have to opt-out to avoid losing their protection.

Those who registered fixed protection by 15 March 2023 and had previously notified their employer of their protection, may now wish to let their employer know that they can be enrolled - without fear of losing their protection.