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

This is an ongoing condition, which means it is still relevant today.

Clients with enhanced protection need to be careful around automatic enrolment contributions.

They also need to be aware that some compensation payments are viewed by HMRC as contributions if they are directed into a pension scheme.

Certain transfers can also mean enhanced protection is lost, as can the establishment of a new pension scheme outside of prescribed circumstances.

If enhanced protection is lost, the member will have to rely on the standard LTA for all future BCEs (unless they also applied for primary protection – see final section).

However, previous BCEs are not reassessed retrospectively.

They will also have to notify HMRC they have lost their protection within 90 days of losing it.

If they do not do this, they may face a fine.

Enhanced protection – lifetime allowance calculations

The main benefit of enhanced protection is that it fully protects the member’s pension rights from the LTA.

This means their pensions will never be subject to the LTA tax charge when they come to be crystallised, regardless of their value at the time.

This is the main difference between primary protection and enhanced protection.

Therefore, LTA usage for members with enhanced protection is calculated as normal.

There are no modifications to the calculation. LTA usage is reported to the member as a percentage of the standard LTA.

Enhanced protection – with no protected lump sum

For clients with enhanced protection, the tax-free lump sum (much like under primary protection) is normally limited to 25 per cent of £1,500,000.

Again, if the standard LTA in the future increases above £1,500,000, it will be limited to 25 per cent of the standard LTA.

For clients with pre-2006 lump sum rights of £375,000 or higher, it was possible for them to protect their lump sum entitlement under enhanced protection as well.

Unlike primary protection, however, the protected lump is expressed as a percentage of the total value of the pension benefits, rather than as a monetary amount.

The percentage is confirmed on the protection certificate.

It may be more than 25 per cent or less than 25 per cent depending on the member’s pre-2006 rights to tax-free lump sum.

Either way, this will still work out more than what they would normally receive based on the current rules.

The lump sum will always be calculated based on the percentage on the certificate. It is not restricted by the member’s remaining available LTA.

Enhanced protection with dormant primary

On a final note, it was possible to apply for both primary protection and enhanced protection at the same time provided the client met the conditions for both.

This was often done for tactical reasons in case the enhanced protection was lost or revoked at a later date.