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Pensions & Primary Protection

Introduction

This briefing sets out the position of how Primary Protection operates considering the removal of the lifetime allowance. 

Core considerations  

  • Primary protection was introduced in 2006 to give some protection against lifetime allowance (LTA) charges. 

  • Tax-free cash rights could be protected if they exceeded £375,000 on 5 April 2006. 

  • Clients were given an enhancement factor which was used to calculate their personal LTA and now applies to the lump sum and death benefit allowance (LSDBA). 

  • Primary protection cannot be revoked, though it can be reduced or cancelled on divorce.  

  • Contributions and benefit accrual does not cancel primary protection.  

Contents

Background and enhancement factor

Primary protection was introduced in April 2006 to protect those with uncrystallised pensions on 6 April 2006 from the full impact of the lifetime allowance (LTA). This was achieved by providing individuals with an enhancement factor to the lifetime allowance. The enhancement was calculated as: 

The value of all pension rights on 5 April 2006 - £1.5m / £1.5m 


Primary protection was only available if someone had pension rights of more than £1.5m on 5 April 2006, and it had to be applied for before 6 April 2009. 

When applying for primary protection, tax-free cash rights could also be registered for protection if the total value of tax-free cash rights (including those already taken) exceeded £375,000 on 5 April 2006. The registered tax-free cash is expressed as a monetary amount.  

Clients have been able to accrue further pension savings since April 2006 without losing the protection. Primary protection cannot be revoked and those who have it cannot apply for fixed protection or individual protection. 

Clients can hold enhanced protection alongside primary protection, in which case primary protection is noted as being dormant as the enhanced protection takes priority.
 

Lump sum allowance and lump sum and death benefit allowance

The removal of the LTA does not mean that primary protection loses its value. Primary protection is still relevant for the purposes of calculating a client’s lump sum and death benefit allowance (LSDBA) and the lump sum allowance (LSA).  

Clients with primary protection have their LSDBA set at: 

  • £1.8M + (£1.8M x primary protection factor). 
     

Clients with primary protection have their LSA set at: 

  • £375,000, if they don’t have protected tax-free cash, or  
  • their protected tax-free cash amount multiplied by 1.2.  
     

Taking benefits with tax free cash protection

Clients are not limited to 25% tax-free cash, instead they can take: 

The registered tax-free cash from 5 April 2006 x 1.2, less: 

  • any tax-free cash taken since 6 April 2012, and 
  • any tax-free cash taken between 6 April 2006 and 5 April 2012 x (£1.8M/the standard LTA at the time the tax-free cash was taken).

This means any pre commencement benefits already in payment before 6 April 2006 are ignored when valuing the available LSA.  

Clients can take any amount of tax-free cash from any pension up to their available protected amount. Once the protected tax-free cash has been used, then no more is available from any scheme.  

It is not possible to apply for a transitional tax-free amount certificate (TTFAC) where clients have primary protection with tax-free cash protection. The available LSA is already based on actual tax-free lump sums a client has received.   

Where primary protection with tax-free cash protection applies, it takes precedence over scheme-specific lump sum protection. 

For example 

Brian had pension rights valued at £2.4m on 5 April 2006, with tax free entitlement of £750,000. He registered for primary protection.  

Brian took £100,000 tax-free cash in August 2008, then took £150,000 tax free cash in January 2019. Brians available LSA is calculated as: 

  • £750,000 x 1.2 = £900,000, less 
  • £100,000 x 1.8m/£1.65m = £109,090.90, less 
  • The £150,000 (is not revalued)  

The available LSA is £900,000 - £109,090.90 - £150,000 = £640,909.10 

 

Taking benefits without tax free cash protection

If no tax-free cash rights were registered, then the client’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: 
    • any tax-free cash taken from 6 April 2024 
    • 25% of any pre commencement benefits taken before 6 April 2006 
    • 25% of the ‘lifetime allowance previously used amount’. This is capped at £375,000.  

The calculation for the ‘lifetime allowance previously used amount’ is different for primary protection. This reflects how the lifetime allowance was calculated immediately before 6 April 2024. Do not compare the percentage of the LTA used against the current LTA, instead, follow the pre-6 April 2024 calculation to determine the value of previous benefits taken as follows: 

Value of benefits taken x CSLA/PSLA.  

  • CSLA is £1.5m (the standard LTA for clients with primary protection) 
     
  • PSLA is the greater of: 
    • Standard LTA when the previous BCE occurred, or 
    • £1.5m.

The revalued lifetime allowance previously used amount is then deducted from both the LSA and LSDBA. This may reduce the LSA to zero.

For example 

Christina used 40% of her LTA in January 2012 (LTA is £1.8m), then used 40% of her LTA in January 2024 (LTA is £1.0731m). The LTA previously used is: 

  • 40% of £1.8m = £720,000 x £1.5m/£1.8m = £600,000 
  • 40% of £1,0731m = £429,240 x £1.5m/£1.5m = £429,240 
  • Total £1,029,240  
     
  • 25% of £1,029,240 = £257,310 

Available LSA is £375,000 - £257,310 = £117,690 

 

Alternatively, if someone has evidence to show what, if any, tax-free benefits they received prior to 6 April 2024, they can apply for a ‘transitional tax-free amount certificate’ (TTFAC) certificate confirming the sum of the lump sums to be deducted from their LSA. 

Clients 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.
 

Losing primary protection – pension debits

If an individual with primary protection must give up some of their pension under ‘pension sharing’ on divorce, their enhancement factor will need to be recalculated accordingly. In some cases, the pension debit may mean that primary protection is lost completely, together with any primary protection on tax-free cash.  

When an individual has become subject to a pension debit, they must notify HMRC. If primary protection has not been lost, then HMRC will issue a new certificate showing the reduced primary protection factor. The reduced factor is then applied to all relevant benefit crystallisation events that take place after the individual’s rights have been reduced by the pension debit. 

More information on reducing the primary protection factor can be found in the Pensions Tax Manual. 

 

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