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Benefits of enhanced protection

Enhanced protection was introduced to offer full protection against lifetime allowance (LTA) tax charges. This was on the condition that all contributions or other relevant benefit accrual ceased before A-Day (6 April 2006).

Anyone could apply for this protection, regardless of the value of their pension savings at A-Day. As long as the protection isn't lost or revoked, there would never be an LTA tax charge.

It was introduced to protect individuals whose benefits were likely to exceed the LTA. Individuals normally had to apply for enhanced protection before 6 April 2009.

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 enhanced protection.

The announcement about the LTA and LTA tax charges does not mean that enhanced protection is no longer valid - it’s still relevant for the purposes of calculating the tax free cash rights and the taxation of certain lump sum payments.

Losing enhanced protection

Before 6 April 2023

Enhanced protection was normally lost if:

• 'relevant benefit accrual' occurred
• certain types of pension transfer were received/made or
• the individual became a member of a new pension arrangement (unless it was a transfer of existing rights)

It's the member's responsibility to tell HMRC if enhanced protection has been lost. Failure to do this within 90 days can result in a financial penalty.

If enhanced protection has been lost, individuals will revert back to the standard LTA unless they have another type of protection to fall back on - for example, primary protection which could have been applied for at the same time as enhanced protection, or individual protection which could have been applied for later.

From 6 April 2023

From 6 April 2023, enhanced protection normally cannot be lost – individuals who still had valid enhanced protection on this date can now recommence pension funding, make transfers and start new arrangements without fear of invalidating the protection.

The exception to this rule is the unlikely situation where an individual has successfully managed (by concession) to register for enhanced protection after 15 March 2023. In these circumstances, the old rules continue to apply and enhanced protection can still be lost.

Relevant benefit accrual

Before 6 April 2023

A condition of maintaining enhanced protection was that there was no 'benefit accrual' after 5 April 2006.

For defined contribution schemes (DC) this normally meant no contributions paid after 5 April 2006.

The only exception being contributions to life cover arrangements set up before A-Day. In these circumstances, as long as the policy had not been significantly altered since A Day - for example, there had been no change to the policy term, contribution levels or cover - protection could be maintained.

For defined benefit schemes (DB) the test was more complicated and was done when:

• the member crystallised benefits under an arrangement
• a permitted transfer was made to a DC scheme or
• a payment of lump sum death benefits was made

Broadly benefit accrual took place if the value of benefits when taken or transferred (the 'relevant event date') was greater than the 'appropriate limit'.

The 'appropriate limit' is the value of the member's DB benefits at 5 April 2006. This can then be increased up to the relevant event date by the greater of:

• 5% a year compound (or RPI if higher) or
• an earnings based recalculation value

The earnings recalculation value allows the A-Day benefits to be revalued using earnings after 6 April 2006.

If the appropriate limit was exceeded, enhanced protection was lost.

More detail on appropriate limit calculations can be found in our guide ‘DB transfers and the appropriate limit’.

From 6 April 2023

Aside from the exception mentioned earlier, contributions can recommence from 6 April 2023 without losing enhanced protection and the appropriate limit is no longer a concern for those in DB schemes. 

This also gives those with enhanced protection the potential to carry forward unused annual allowance from the three tax years before 2023/24 when they were unable to fund their pensions.  

Enhanced protection and transfers

From 6 April 2023, transfers do not normally affect an individual’s enhanced protection - with the exception mentioned earlier.

Even before 6 April 2023, individuals with enhanced protection would normally be protected if they transferred their benefits to another scheme. But, the transfer had to be a permitted transfer - which had to meet certain criteria.

Transfers that didn't affect enhanced protection

• DC to DC
• DB or cash balance to DC, as long as the transfer payment:
  
  
  • was the actuarial value of the pension rights being transferred - for example, it was not an enhanced transfer
  • the amount transferred was within the appropriate limit

Additionally, the receiving scheme had to be either a registered pension scheme or a QROPS.

Transfers that would have resulted in a loss of enhanced protection

• DC to DB or cash balance
• Any transfer to an unregistered pension scheme or an overseas scheme which was not a QROPS
• DB to DC if the transfer payment was not the actuarial value of the pension rights being transferred - for example, where an enhanced transfer was given
• DB to DC if the transfer payment was above the appropriate limit
• DB or cash balance to DB or cash balance - unless the transferring scheme was being wound up and the receiving scheme was for the same employment, or the benefits were being transferred as part of a relevant business transfer
• A transfer as a result of a pension sharing order, where a new arrangement was set up to receive pension credit rights directly from the original member's pension.
  
  However, if the pension credit was paid into an existing arrangement, enhanced protection was not affected. Thereafter, the pension credit rights could be transferred to a new arrangement, normally without affecting enhanced protection.

A transfer from a scheme that was not a UK registered pension scheme didn't, in itself, result in the loss of enhanced protection. But if a new arrangement was set up to accept the transfer, then enhanced protection was lost.

Partial transfers from DB schemes

Before the Spring Budget 2023 changes, where the value of a 'permitted transfer' exceeded the appropriate limit, enhanced protection was lost. But to avoid this, a partial transfer could have been considered to ensure protection was maintained.

Not all schemes offered this but, where it was available, individuals could transfer some of their pension benefits up to the level of the appropriate limit without losing their enhanced protection.

After the partial transfer has been made, there was still the potential to lose enhanced protection, so care was needed when taking benefits. This generally meant crystallising all the benefits in the DC Scheme before triggering a further appropriate limit test on the remaining DB scheme. This ensured that the DC scheme could be taken under enhanced protection, even if the testing of the remaining DB scheme exceeded the appropriate limit.

A further test against the appropriate limit would have occurred:

• when remaining DB benefits were taken
• on completion of a further partial, or full, transfer out
• on the payment of a lump sum death benefit, or
• when the individual reaches age 75

The test compared the value of benefits remaining within the DB scheme together with the amount previously transferred out against the appropriate limit when the event occurred.

A partial transfer could still be a useful strategy to maintain enhanced protection for someone who has successfully managed to register for enhanced protection (by concession) after 15 March 2023.

For more detail, please see our guide ‘DB transfers and the appropriate limit’.

Divorce

Enhanced protection was not affected if someone became subject to a pension debit as a result of a pension sharing order. But, before 6 April 2023, they wouldn't have been able to rebuild their pension benefits without losing the protection.

Care was needed when giving advice on securing pension credit rights for someone with enhanced protection:

• If a new arrangement was set up before 6 April 2023 to accept the pension credit directly from the original member's pension, enhanced protection was lost - this would still be the case for anyone who has successfully managed to register for enhanced protection (by concession) after 15 March 2023
• But if it was paid into an existing pension arrangement, enhanced protection was not affected. After that, the pension credit rights can normally be transferred to a new arrangement without affecting the protection

Taking benefits

Before taking benefits the pension provider or trustees should be given a copy of the enhanced protection certificate. This remains the case from 6 April 2023, even though there would be no LTA tax charge, as it’s relevant for the calculation of tax free cash rights. Without this, the provider would calculate the free cash based on the remaining percentage of the standard LTA .

Under enhanced protection, the level of tax free cash available depends on whether or not tax free cash rights were also registered.

Registered tax free cash

If someone applying for enhanced protection had rights to tax free cash in excess of £375,000 at A-Day, this could also be protected. The enhanced protection certificate will confirm the amount that can be taken as a percentage of the uncrystallised fund. The percentage itself may be greater or less than 25%.

The registered tax free cash percentage will apply each time uncrystallised benefits are taken after A-Day, and is not lost if tax free cash is taken at different times.

However, from 6 April 2023, this protection will be capped at the tax free cash value on 5 April 2023.

New contributions can be made after 5 April 2023 without losing this protection, but they will not generate any new tax free cash entitlement.

No registered tax free cash

If tax free cash rights were below £375,000 at A-Day, they won't be mentioned on the enhanced protection certificate. The tax free cash rights will be the lower of:

• 25% of the crystallised value being taken
• 25% of £1.5M* less any previous crystallisation amounts revalued

* unless it was exceeded by the standard LTA

The revaluation of previous tax free cash taken is dependent on when the previous crystallisations happened - but the basic calculation formula is:

Amount crystallised x (CSLA/PSLA)

As the LTA hasn’t exceeded £1.5M since the 2011/12 tax year, this means that there’s no revaluation of benefits crystallised since 6 April 2012. This is because the value of benefits crystallised is multiplied by £1.5M/£1.5M.

Scheme-specific tax free cash

If someone had lump sum rights below £375,000 and were unable to register their tax free cash, they may still be able to get more than 25% tax free cash from a particular pension scheme. This would be possible if the individual was entitled to more than 25% tax free cash from that scheme at A-Day.

To benefit from 'scheme-specific' tax free cash, the whole fund must be crystallised at the same time, although it's possible for everything in excess of tax free cash to be left in a flexi-access drawdown account.

Death benefits

The impact of paying pension death benefits for individuals with enhanced protection depends on the type of scheme they're paid from.

DC schemes

Enhanced protection fully covers the death benefits paid from a DC scheme. This means that, regardless of value, the following types of death benefit could be paid out without suffering an LTA tax charge:

• lump sum
• inherited drawdown for a dependant/ other beneficiary
• lifetime annuity for a dependant/other beneficiary
• insured life cover lump sum (see section on life assurance policies)
• dependant's scheme pension

DB schemes - dependant's pension or lump sum

For a DB scheme, the type of death benefits paid out determined the position.

• Dependant's scheme pension: Death benefits paid as a dependant's scheme pension were not tested against the appropriate limit and didn't invalidate enhanced protection or incur an LTA tax charge.
• Defined benefit lump sum: To maintain enhanced protection, lump sum death benefits had to be within the appropriate limit. The appropriate limit could be calculated using the same calculation as described above, or in some circumstances, be recalculated using the value of lump sum death benefits at A-Day, if that produced a higher figure.

However, from 6 April 2023, enhanced protection normally cannot be lost - apart from the exception previously mentioned.

Contributions for life assurance policies

Payments to defined contribution schemes had to stop after A-Day to retain enhanced protection. However, they can normally recommence from 6 April 2023 without invalidating the protection.

Before 6 April 2023, there were certain exceptions which allowed contributions for life cover to continue, without invalidating enhanced protection. To qualify for this exemption:

• payments into the policy had to only be used for life cover
• the insurance contract must have been in place on A-Day (i.e. started before 6 April 2006). Post A-Day policies could replace original contracts, but only if the original was surrendered to comply with either:
  
  
  1. Employment Equality (Age) Regulations, or
  2. Section 255 of Pensions Act 2004 - which stops occupational pension schemes from providing life cover only benefits
• there were no surrender rights under the policy
• the policy's only pay-out option was on the member's death
• the terms of the policy had not been 'significantly' changed

Enhanced protection - applications

Individuals normally had to apply for enhanced protection before 6 April 2009.

Those with enhanced protection will hold a certificate confirming the details plus any registered tax free cash entitlement (if applicable). Each certificate has a unique reference number.

Updating or revising an existing certificate

While normally no new applications can be submitted for enhanced protection, HMRC still allow existing certificates to be updated or revised.

One of the more common corrections is in relation to tax free cash entitlement - usually as a result of incorrect information being provided on the original application or the discovery of a forgotten pension.

If you need to amend or revise a client's existing enhanced protection certificate, you should complete the APSS200 form with the new details and submit it online to HMRC.