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Background to primary protection

Primary protection was introduced, alongside enhanced protection, in April 2006. Its purpose was to protect those who still had uncrystallised pensions on 6 April 2006 (A-Day) from the full impact of the 'lifetime allowance' (LTA) tax charge.

It was also possible for some individuals to register their tax-free cash rights for protection.

Unlike enhanced protection, primary protection did not guarantee to protect all uncrystallised pension rights from the LTA tax charge - instead, it awarded individuals with an enhancement to the LTA. However, it does allow further pension savings or benefit accrual on or after A-Day - until 6 April 2023, this was not allowed for those with enhanced protection. 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.  

The Spring Budget 2023 announced that the LTA would be abolished from 6 April 2024 and that LTA tax charges would not apply for tax year 2023/24.

However, the removal of the LTA does not mean that primary protection is no longer valid. New allowances have replaced the LTA and primary protection is still relevant for the purposes of calculating the individual’s ‘lump sum allowance’ (LSA) and ‘lump sum and death benefit allowance’ (LSDBA). These allowances cap the amount of tax-free lump sums that can be paid during the member’s lifetime and on death.

Eligibility

Primary protection was only available to those with total pension rights of more than £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 on 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 was then used to calculate the member’s personal LTA.

The 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.

Although the LTA has been abolished, the enhancement factor still has relevance as it’s used now to calculate the individual’s LSDBA.

The enhancement factor has no impact on tax-free cash.

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 on 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 on 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).    

Taking benefits

When taking benefits under primary protection, there were historically two calculations required:

• the level of LTA available - this was worked out using the enhancement factor, but if any benefits had already been taken, they had to be revalued to see how much was 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

Since the abolition of the LTA, it’s just the level of tax-free cash available that needs to be calculated and tested against the LSA. There’s no testing of benefits paid as a pension.  

Before taking benefits, the pension provider or trustees should be given a copy of the primary protection certificate. Without this, the provider would test the member’s tax-free cash against the standard LSA.

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

No registered tax-free cash

If no tax-free cash rights were registered then the individual’s LSA is £375,000.

The maximum tax-free cash available when crystallising benefits will normally be the lower of :

• 25% of the crystallised value of the benefits being taken, and
• £375,000 less*
  
  
  • 25% of the LTA used up by any benefits taken before 6 April 2024 and
  • any tax-free cash taken on or after 6 April 2024

* If any benefits were taken before A-Day and were not tested against the LTA - i.e. because there were no benefit crystallisation events before 6 April 2024 - then 25% of the value of these benefits also needs to be deducted.

Alternatively, the new rules provide that if clients can evidence how much tax-free cash they’ve actually received in the past, they can apply for a ‘transitional tax-free amount certificate’ (TTFAC) certificate confirming the aggregate amount to be deducted from their LSA. For some clients this may increase the remaining LSA and, therefore, more tax-free cash than under the standard calculation.

Clients who potentially could receive more tax-free cash post-April by obtaining a TTFAC include, for example, those who:

• took low or no tax-free cash because their scheme had generous guaranteed annuity rates
• were in DB schemes but didn’t commute pension for their full tax-free cash entitlement
• took benefits during the four tax years when the LTA was lower than £1,073,100 (i.e. 2016/17 to 2019/20)

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 and therefore have ‘scheme-specific tax-free cash protection.

For the purpose of LSA testing, only 25% of the value of benefits crystallised will count towards the individual’s LSA - the excess tax-free cash above that can be ignored.

Registered tax-free cash

When crystallising benefits, the maximum tax free-cash available is: 

• the registered tax-free cash multiplied by 1.2 (i.e. £1.8M/£1.5M) less:
  
  
  • any tax-free cash taken from 6 April 2012, and
  • any tax-free cash taken from 6 April 2006 to 5 April 2012 x (£1.8M/PLTA)
    
    where PLTA = the standard LTA at the time the tax-free cash was taken

Individuals with registered tax-free cash rights under primary protection cannot apply for a TTFAC.

Death benefits

On death before age 75, certain death benefits have to be tested against the allowance in force at the time. Before 6 April 2024 this was the LTA and, from that date, it’s the LSDBA.

Lump sum and death benefit allowance

For those with primary protection, their LSDBA is set as £1.8M + (£1.8M x primary protection factor).

Any death benefits paid from pensions crystallised before 6 April 2024 are not tested against the LSDBA. 

The LSDBA is a combined allowance for both lifetime tax-free lump sums and tax-free lump sum death benefits. So, the amount available for lump sum death benefits will be reduced by any tax-free cash amounts the member has taken, including any serious ill-health lump sums*.

Lump sum death benefits in excess of the available LSDBA are subject to income tax at the beneficiary’s marginal rate.

As the name suggests, it only applies to lump sum payments, so any death benefits paid as a pension are not tested. This emphasises the importance of being in the right scheme and getting nominations in place so that beneficiaries have all the death benefit options available and, on death of the member before age 75, can receive the death benefits tax free. Beneficiary's drawdown avoids LSDBA testing and gives maximum flexibility in how much and when benefits are drawn.

* As with tax-free cash (see above), obtaining a ‘transitional tax-free amount certificate’ can produce more available LSBA than the standard calculation for some individuals who took some benefits before 6 April 2024.  Regardless, of which calculation is used, the maximum deduction from the LSDBA in respect of any tax- free cash taken before 6 April 2024 is £375,000.

Pension sharing and primary protection

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.

Revising an existing certificate

While no new applications can normally 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 because 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.