Pensions and Enhanced Protection
Introduction
This briefing explains how Enhanced Protection operates considering the removal of the lifetime allowance.
Core considerations
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Enhanced protection was introduced in 2006 to protect clients from any lifetime allowance charges.
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Tax free cash rights could be protected if they exceeded £375,000 on 5 April 2006.
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There are two forms of enhanced protection, one with tax free cash protection and one without.
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Enhanced protection generally had to be applied for no later than 5 April 2009.
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Between 6 April 2006 and 5 April 2023 there were a number of benefit cessation events that would result in the protection being lost.
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Since 6 April 2023 those with enhanced protection can pay into their pensions or transfer without losing their protection.
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With the removal of the lifetime allowance, enhanced protection now provides caps on the lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA).
Contents
- What is enhanced protection?
- Lump sum allowance and lump sum and death benefit allowance
- Transferring with enhanced protection
- Taking benefits with tax-free cash protection
- Taking benefits without tax-free cash protection
- Losing enhanced protection
What is enhanced protection?
An individual could claim enhanced protection regardless of the value of their pension rights on 5 April 2006, and could protect their tax-free lump sum rights. As a result, enhanced protection has two forms, one with tax-free cash protection and one without. The deadline to apply for enhanced protection was 5 April 2009, although HMRC have permitted late applications in extenuating circumstances.
Clients with pension rights valued at more than £1.5 million on 5 April 2006 could claim both enhanced protection and primary protection. Enhanced protection takes precedence unless it is lost or given up.
Enhanced protection meant individuals would not face any lifetime allowance charge when those rights came into payment between 6 April 2006 and 5 April 2023, which was when the lifetime allowance charge was removed. From 6 April 2024 the lifetime allowance has been abolished. Those with enhanced protection now have a protected lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA).
Lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA)
Where tax-free rights exceeded £375,000 on 5 April 2006 an individual’s enhanced protection certificate details the percentage of their uncrystallised fund that is available tax-free. The tax-free rights from each pension are now capped to the amount that was available on 5 April 2023.
The tax-free entitlement from 5 April 2023 has now become the LSA for each pension, essentially ignoring any previous crystallisation events. Individuals with enhanced protection without lump sum protection have a LSA of £375,000.
In either case the LSDBA is fixed to the value of uncrystallised rights on 5 April 2024, essentially ignoring previous crystallisation events. The transitional rules to calculate how much the LSDBA is reduced for benefits taken before 6 April 2024 do not apply to those with enhanced protection.
| LSDBA | LSA | |
|---|---|---|
| Without lump sum protection | The value of uncrystallised rights on 5 April 2024 | £375,000 |
| With lump sum protection | The value of uncrystallised rights on 5 April 2024 | The value of tax-free lump sums available from each pension on 5 April 2023 |
Transferring with enhanced protection
From 6 April 2023 transferring to another pension scheme will normally not cause the enhanced protection to be lost.
Where a client has enhanced protection, if they transfer a pension to another scheme the ceding scheme must provide details of the LSA and LSDBA to the receiving scheme. They also need to detail any relevant tax-free lump sums that have been paid since 5 April 2023 that would reduce the available tax-free lump sums that can be paid. This enables the receiving scheme to continue to cap the tax-free lump sums to those applicable to the ceding scheme.
Taking benefits with tax-free cash protection
The tax-free percentage shown on the enhanced protection certificate applies each time uncrystallised benefits are taken, with the available LSA for that pension as an overall cap.
The available LSA will be reduced by each relevant benefit crystallisation event from that pension since 6 April 2024, along with any tax-free cash paid from that pension since 6 April 2023.
The tax-free lump sums available from a pension cannot be taken from a different pension. So, if a client does not take the maximum tax-free available from each pension, then that availability would be lost and could not be taken from another pension instead.
Where an individual qualifies for scheme specific tax-free cash (tfc) from a pension then all the tax-free cash paid is deducted from both the LSA and the LSDBA for that arrangement.
Restrictions to be aware of:
- Uncrystallised funds pension lump sum (UFPLS) is not available where lump sum protection applies.
- Tax-free cash is not available if a client has previously taken a serious ill health lump sum.
For example - available LSA and LSDBA for enhanced protection with tax-free cash protection
Mark has enhanced protection with protected lump sum rights at 30%. On 5 April 2023 Mark holds the following uncrystallised pensions:
- Personal Pension valued at £500,000, with 30% tax-free rights of £150,000
- SIPP valued at £1,000,000, with 30% tax-free rights of £300,000
Mark’s employer contributes £50,000 into his Personal Pension in the 2023/24 tax year.
Mark has crystallised £200,000 from his SIPP to receive £60,000 tax-free cash and move £140,000 into drawdown.
On 5 April 2024, the uncrystallised value of the:
- Personal Pension is £600,000
- SIPP is £850,000
As Mark has lump sum protection, then the LSA and LSDBA are calculated for each pension.
For the Personal Pension:
- The LSA is £150,000
- The LSDBA has increased from the value on 5 April 2023 accounting for fund growth and the additional contributions so is £600,000.
For Mark’s SIPP:
- The available LSA is the £300,000 which was available on 5 April 2023 minus the tax-free lump sum of £60,000 paid since that date, the remaining LSA is £240,000.
- The available LSDBA is £850,000 which is lower than the value from 5 April 2023 as it was not set until 5 April 2024 accounting for fund growth and the £200,000 crystallised.
Taking benefits without tax-free cash protection
Where tax-free rights were less than £375,000 on 5 April 2006, clients have no tax-free cash protection on their enhanced protection certificate. Where this is the case tax-free cash is not calculated for each arrangement, but instead the maximum tax-free cash will be the lower of:
- 25% of the value being taken, or
- The available LSA of £375,000 less:
- any RBCE on or after 6 April 2024 and
- 25% of the lifetime allowance previously used amount.
- 25% of any pre commencement benefits taken before 6 April 2006
If an individual has never accessed 25% tax free cash from crystallisation events before 6 April 2024, they may benefit by applying for a transitional tax-free amount certificate.
They may still qualify for scheme specific tax-free cash from some of their pensions even if their overall tax-free rights were less than £375,000 on 5 April 2024. Where this is the case the maximum tax-free cash from that scheme will be greater than 25%.
When paying scheme specific tax-free cash, the LSA is reduced by 25% of the total benefits taken even if a greater percentage has been paid tax-free. The LSDBA is reduced by 100% of the tax-free amount paid.
For example
Joseph had pension benefits valued at £1.8m on 5 April 2006, with tax-free rights of £350,000. He applies for enhanced protection with no protected lump sum.
However, one of his pensions was valued at £400,000 and had an entitlement to £150,000 tax-free cash, which equated to 37.5% scheme specific tax-free cash.
He took pension benefits valued at £1m in June 2016 but did not access the pension scheme with scheme specific tax-free cash.
The benefits taken are revalued to calculate the lifetime allowance previously used amount, on this occasion the £1m is multiplied by £1.5m and divided by £1.5m, so there is effectively no change.
£250,000 (25% of £1m) is deducted from both the member's LSA and LSDBA when further benefits are paid.
On 5 April 2024 his uncrystallised pensions were valued at £1.8m, so this becomes his LSDBA.
His LSA is £375,000.
Joseph takes the scheme specific tax-free cash in September 2024. At that time the value of the plan increased to £800,000. The scheme specific tax-free cash available is calculated as:
(£150,000 x 1.2) + 25% x (£800,000 – (£400,000 x £1.8m/£1.5m))
This shortens to:
£180,000 + 25% of (£800,000 - £480,000)
£180,000 + £80,000
maximum tfc is £260,000
Joseph’s LSA of £375,000 is reduced by £250,000 due to the benefits taken in 2016, leaving £125,000.
The maximum tfc of £260,000 scheme specific tax-free cash is not capped by the available LSA of £125,000, so the full £260,000 can be paid.
Joseph takes the full £260,000 tax-free cash, the remaining £540,000 is placed into drawdown.
His LSA is reduced by 25% of the total value of benefits taken which is £800,000 x 25% = £200,000, and his LSDBA is reduced by £260,000.
After this payment, Joseph has no remaining LSA due to the benefits taken in 2016 and the scheme specific tax-free cash.
His remaining LSDBA is £1.8m - £250,000 - £260,000 = £1,290,000
Tax-free cash and UFPLS is not available if an individual has previously taken a serious ill health lump sum, regardless of the size of that lump sum.
Losing enhanced protection
From 6 April 2023, those who applied for enhanced protection prior to the 15 March 2023 can accrue benefits, transfer, or join new arrangements without losing their protection.
For any enhanced protection certificates applied for on, or after the 15 March 2023, an individual can have a cessation event occur which will cancel the protection. The most common cessation events are:
- relevant benefit accrual
- where an arrangement received an impermissible transfer
- where a new arrangement relating to the individual is established other than to receive a permitted transfer, or relevant compliance exercise. Auto enrolment is a typical example.
Full details of cessation events, including permitted and non-permitted transfers can be found on the pensions tax manual. As most individuals with enhanced protection will have applied for the protection before 15 March 2023, protection cessation events will now be rare.
If enhanced protection is lost because of benefit accrual individuals must notify HMRC within 90 days of the occurrence.
An individual may choose to voluntarily give up their enhanced protection at any time and must notify HMRC. This may be beneficial if they also hold primary protection, and the rights under primary protection would be more tax advantageous.