Techzone

Overview

Primary protection was introduced, alongside enhanced protection, in April 2006. Its purpose is to protect those who still had uncrystallised pensions at 6 April 2006 (A-Day) from the full impact of the lifetime allowance (LTA) tax charge. However, for tax year 2023/24, there will be no LTA tax charges  - although benefits taken will still be tested against the LTA. The intention is that the LTA will be abolished from 6 April 2024.

Primary protection can also provide a higher entitlement to tax free cash rights.

Unlike enhanced protection, primary protection did not guarantee to protect all uncrystallised pension rights from the LTA tax charge - instead, it awards individuals with an enhancement to the LTA. However, it does allow further pension savings or benefit accrual on or after A-Day - although further funding won’t increase the protected amount.  

Some individuals also applied for enhanced protection, which meant that primary protection was ‘dormant’. So if enhanced protection was lost - for example, because of post A-Day pension contributions or benefit accrual before 6 April 2023 - or revoked, the individual could fall back on primary protection. 

Primary protection cannot be revoked and those who have it cannot apply for ‘fixed’ or ‘individual’ protection.  

Eligibility

Primary protection was only available to those with total pension rights in excess of £1.5M on 5 April 2006, and it had to be applied for before 6 April 2009.

When valuing total pension rights, this included pensions already in payment on 5 April 2006 as well as savings yet to be crystallised.

Those eligible for primary protection could also register their tax free cash rights for protection if they were valued at more than £375,000 on 5 April 2006. This value also included a notional figure in respect of tax free cash from pensions already in payment at 5 April 2006. 

Protected amounts

When an individual registered for primary protection, they would have received a certificate from HMRC confirming their LTA enhancement factor and the amount of protected tax free cash, if any.

The enhancement factor is then used to calculate the member’s personal LTA.

The LTA enhancement factor

This was simply the difference between the value of pension rights on 5 April 2006 (both crystallised and uncrystallised) and £1.5M, as a fraction of £1.5M:

   (5 April 2006 value - £1.5M) / £1.5M

The answer was rounded up to two decimal places.

Tax free cash

At the time of registering for primary protection, tax free cash in respect of uncrystallised pensions could also have been registered for protection if the total value of tax free cash rights (including a notional figure* in respect of tax free cash from pensions already in payment) exceeded £375,000 on 5 April 2006. 

The amount of registered tax free cash is expressed as a monetary amount, not a percentage. This registered amount is then revalued when taking benefits - more on this later.

It’s important to note that when tax free cash has been registered for primary protection:

• only the revalued registered tax free cash can be paid as tax free cash - no more tax free cash is available from payments after 5 April 2006
• even where the tax free cash at 5 April 2006 is more than 25% of the fund, the ultimate tax free cash allowed at retirement could be less than 25% if the fund grows at a greater rate than the protected tax free cash

*  The notional value of tax free cash rights for pensions in payment at 5 April 2006 was calculated as 25% of the benefit value as at 5 April 2006, regardless of the actual amount taken (if any) - with the benefit value being 25 times the pension in payment (or, for drawdown pensions, 25 times the maximum income at the last income review before 6 April 2006).    

For example, a pension in payment at 5 April 2006 of £20,000 a year was given a value of £500,000 (25 x £20,000). This pension was assumed to have generated tax free cash rights valued at £125,000 (25% x £500,000) at 5 April 2006.

Taking benefits

When taking benefits under primary protection, there are normally two calculations required:

• the level of LTA available - this is worked out using the enhancement factor, but if any benefits have already been taken, they will have to be revalued to see how much is left 
• the level of tax free cash available - this will depend on whether or not tax free cash was registered under primary protection and also if any benefits have already been taken - if so, they will have to be revalued to see how much of the protected amount is left

Applying the enhancement factor when taking benefits

To calculate an individual’s personal LTA, the enhancement factor is applied, currently, to £1.8M. This figure is used to ‘underpin’ the LTA as it’s the highest the LTA reached before a series of LTA reductions.

For crystallisation events before 6 April 2012, the individual’s enhancement factor was applied to the standard LTA in force at the time.

If benefits were taken in excess of the LTA before 6 April 2023, the excess benefits were subject to an LTA tax charge.

Revaluing benefits already taken

Each time new benefits are crystallised, previously taken benefits must be revalued to see how much LTA is available.

The revaluation calculation is:

• amount previously crystallised x (current LTA* / LTA at previous crystallisation)

* When revaluing crystallisation events before 6 April 2014, £1.5M is used if it’s higher than the current LTA. This was introduced because the reductions in the LTA had the effect of reducing the value of previous crystallisations. This measure limits the effect.

Registered tax free cash

Firstly, it’s worth noting that when benefits are crystallised, tax free cash and the associated pension benefits are both tested against the LTA, with the tax free cash deemed to be taken first. So, as long as any registered tax free cash entitlement doesn’t exceed the personal LTA available, the tax free cash will not be restricted. This meant that, before 6 April 2023, any LTA tax charge fell on the ‘income’ pot.

When taking benefits, the registered amount of tax free cash is increased by the growth in the standard LTA between A-Day and the date that the benefits are taken.

But, for benefits taken after 5 April 2012, this increase is calculated using an 'underpinned' LTA of £1.8M.

So, for any current crystallisations:

Tax free cash entitlement = registered tax free cash x ( £1.8M / £1.5M )

Taking benefits at different times

Registered tax free cash can be taken from different pension schemes at different times and in different proportions - so long as the total tax free cash taken from all schemes isn't more than the protected amount. There's no link between the crystallised value of the benefits being taken from a scheme and the tax free cash paid from that scheme.

When deciding on which schemes to take protected cash from, it's important to note that if a money purchase scheme is taken fully as tax free cash under primary protection, this will trigger the money purchase annual allowance (MPAA) - currently £10,000 per tax year.

In calculating the amount of tax free cash available, any tax free cash already taken has to be revalued and subtracted from the increased registered amount.

The revalued amount of any tax free cash previously taken is calculated as:

• value of tax free cash taken x (SLTA/PLTA)

where:

• SLTA = the standard LTA - but, if the calculation date is after 5 April 2012, £1.8M is used.
• PLTA = the standard LTA at the time of the previous crystallisation event - but, if the cash being revalued was crystallised after 5 April 2012, £1.8M is used.

No registered tax free cash

If no tax free cash rights were registered then the maximum amount allowed is normally the lower of:

• 25% of the crystallised value of the benefits being taken
  and
• 25% of [£1.5M* (or the standard LTA if higher) less the revalued amount of any previously crystallised benefits].

The actual amount(s) of any tax free cash taken previously is not relevant for the calculation.

* Although the LTA has subsequently been reduced, those with primary protection but no registered tax free cash rights are allowed to retain a notional £1.5M for their tax free cash calculation.

Revalued amount of benefits taken previously

For tax free cash purposes only, the revalued amount of any previously crystallised benefits is calculated as:

• value of benefits crystallised x (SLTA/PLTA)

where:

• SLTA = the greater of £1.5M and the current standard LTA
• PLTA = the greater of £1.5M and the standard LTA at the time of the previous crystallisation event.

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.

Events that can affect the level of primary protection

Pension sharing

If an individual with primary protection has to give up some of their pension under ‘pension sharing’ on divorce, their enhancement factor will be reduced accordingly.

In some cases, the ‘pension debit’ may even mean that primary protection is lost completely, together with any primary protection on tax free cash. This is the only situation where primary protection can be lost.

If someone with primary protection receives a ‘pension credit’, this doesn’t affect their primary protection enhancement factor. But, in some circumstances, they can claim an additional enhancement factor.

For more details, see our technical guide ‘Pension sharing and the lifetime allowance’. 

Death benefits

When registering for primary protection, it was only retirement benefits that were taken into account - the rights to life assurance cover or other lump sum benefits that only had a value on death could not be included.

However, on death, a recalculation of the primary protection enhancement factor to cover lump sum rights is possible in some circumstances.

Revising an existing certificate

While no new applications can be submitted for primary 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 a client’s existing primary protection certificate needs amended or revised, the APSS200 form should be completed with the new details and submitted online.