How to navigate protection and the lifetime allowance

  • Describe the application conditions for enhanced and primary protection
  • Calculate the lifetime allowance usage under each form of protection
  • Calculate the maximum tax-free lump sum amounts

For BCEs from 2012/13 onwards, the personal LTA is calculated by applying the enhancement factor to what is known as the underpinned LTA, which is set at £1,800,000.

personal LTA = underpinned LTA + (LTA factor x underpinned LTA)

The underpinned LTA will remain in the calculation unless the standard LTA exceeds £1,800,000, at which point the personal LTA calculation will again be based on the standard LTA.

For BCEs before 2012/13, the factor was applied to the standard LTA in place at the time.

While it does not seem overly rational or helpful to a lot of people, note that the LTA usage for primary protection is reported to the member as a percentage of the standard LTA, not as a percentage of the personal LTA.

Primary protection – tax-free lump sum calculations

Ordinarily, the value of tax-free lump sum is limited to the lower of:

  • 25 per cent of the value being crystallised; or
  • 25 per cent of the member’s remaining standard LTA at the time of the BCE.

When calculating the maximum tax-free lump sum for a client with primary protection, however, the lump sum is limited to 25 per cent of £1,500,000 (£375,000).

It is not limited to 25 per cent of the underpinned LTA (£1,800,000) or 25 per cent of the personal LTA.

This applies unless the standard LTA in the future increases above £1,500,000, at which point it is limited to 25 per cent of the standard LTA.

If the member was entitled to a tax-free lump sum on 5 April 2006 of more than £375,000, they could preserve that entitlement after 2006 by applying for lump sum protection as part of their primary protection application.

The protected lump sum is confirmed on the protection certificate and is expressed as a monetary amount.

When calculating the tax-free lump sum at a BCE, the monetary amount is revalued or indexed in line with the change in standard LTA. Therefore, the calculation looks like this.

Lump sum at A-Day x (standard LTA at current BCE standard LTA at A-Day)

However, while the standard LTA is less than £1,800,000 - as it is now - the underpinned LTA of £1,800,000 is used in the calculation.

Lump sum at A-Day x (underpinned LTA standard LTA at A-Day)

Enhanced protection – application conditions

Unlike with primary protection, there was no fund value requirement for enhanced protection, meaning people could apply for enhanced protection even if their benefits were worth less than £1,500,000.

However, there were still prescribed forms to complete, and the deadline for application was again 5 April 2009.

The key application condition for enhanced protection was that the member could not have had any relevant benefit accrual from 6 April 2006 onwards.

This means they could not have made a contribution to a defined contribution scheme and they could not have accrued benefits under a defined benefit scheme (above a certain limit).