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Bill Barnfield’s whirlwind guide to Protection

Protection against the Lifetime Allowance Charge

The Standard Lifetime Allowance (SLA), an across the board limit on funds, applies from 6.4.2006:

Funds crystallised (turned into benefits) in excess of the SLA attract a Lifetime Allowance Charge (LAC) of 55% of the excess if it is taken as cash, but 25% if used for pension – which itself is taxable.

However people with large funds at 6.4.2006 can apply for Protection. There are 2 main types:

Primary Protection: increases the SLA by a factor

The total value of all pension benefits has to be at least £1.5m. If it was £3m a factor of 2 x the SLA would apply and if all funds are crystallised in May 2010, the limit would be 2 x £1.8m = £3.6m.

You can still contribute but that’s about all. The limit could be breached just by good investment performance; but if investments perform badly it is possible to make up the loss.

Enhanced Protection: protects the actual amount of the fund

The value can be less than £1.5m. This is useful for funds which were borderline at A-Day but could overtake the SLA when benefits are taken. However no contributions or benefit accrual are allowed.

Enhanced Protection can also be lost by Transfers out, other than by a “bulk transfer” or on scheme wind up, or by setting up a new arrangement, unless it’s to receive a permitted transfer as above.

Company scheme benefits first need to be tested for over-funding, and any excess surrendered.

The two can be combined: If Enhanced Protection is lost or surrendered, Primary continues to apply.

Other types of Protection, starting with Lump Sum Protection

The right to tax-free cash of more 25% of fund value can be protected by the Administrator of the scheme in which the higher entitlement arose, and this can be maintained if there was a bulk transfer or on wind up. Any lump sum over £375,000 at 6.4.2006 would need reporting to HMRC.

Pension Age Protection

Taking benefits before age 50 (55 from April 2010)  These will be hit by an unauthorised payments charge unless retirement is due to ill health or the member was in a scheme with a protected early retirement age before 10.12.2003. Apart from certain public service schemes, the SLA is reduced by 2.5% for each complete year between benefit crystallisation and Normal Minimum Pension Age (50/55).

Pension Credit Protection

Credits granted on divorce before 6.4.2006. The credit, RPI indexed from the date it was granted, increases the lifetime allowance. If it was worth £60,000 by 5.4.2006, the new lifetime allowance would be £1,560,000 or 104% x SLA. If there was already Primary Protection the credit would have been included in the fund at 6.4.2006.

Pension Debits

Which only occur post 6.4.06.  If Enhanced Protection applies these reduce the protected fund and it can’t be made up.

If Primary Protection applies, the percentage of SLA reduces and if the Debit takes the fund below £1.5m, Primary is lost altogether. The amount imposed is carried back in full to 6.4.2006.

Protection and Death Benefits

There is no separate protection for death benefits but it will usually be covered within Primary or Enhanced. Payment of a lump sum is usually tax-free but if more than the SLA or the deceased’s lifetime limit is due, HMRC need to be told in advance so they can consider increasing the limit.

Overseas Rights and Overseas Transfer Protection

People working overseas but accruing benefits in a UK registered pension scheme can obtain protection for rights built up after 5.4.2006. The resulting fund value is added to the SLA.

Some overseas benefits can also be transferred to UK schemes and protected in the same way.

Applying for Protection – this must be done by 6.4.2009!!

Valuing the fund at 6.4.2006. HMRC factors

Forms needed to apply:

• Primary Protection and/or Enhanced Protection: APSS 200 – Protection of Existing Rights.
• Pension credits:  APSS 201 – Enhanced Lifetime Allowance (Pension Credit Rights)
• Authority for scheme administrators to view the Protection Certificate: APSS 203

If someone loses enhanced protection or no longer wants it, they have to notify HMRC within 90 days. If anyone ‘fraudulently or negligently’ gains a higher lifetime allowance or lump sum than they should, the penalty is up to 25% of the excess claimed.

When HMRC have processed the form they issue a certificate which has its own reference number and confirms the enhanced lifetime allowance and any protected lump sum amount or percentage.

If you would like to see our Protection case studies please give us a call

May 7, 2008