How to navigate protection and the lifetime allowance

  • Describe the application conditions for the different forms of fixed protection and individual protection
  • Explain how fixed protection and individual protection work
  • Describe the different levels at which the LTA is capped
How to navigate protection and the lifetime allowance

The lifetime allowance  is a general limit on the amount of benefits you can take from your pension schemes before you incur tax charges.

It was introduced in 2006/07 as part of the ‘A-day’ pension simplification process, which ushered in new tax rules that applied to all types of pension.

The LTA was initially set at £1,500,000, rising incrementally to £1,800,000 in 2011/12. 

HM Treasury then reduced it on three separate occasions – 2012, 2014 and 2016 – taking it down to £1,000,000 before it started being increased annually in line with inflation.

In a previous article, I looked at enhanced protection and primary protection. These were the two forms of LTA protection introduced in 2006.

In this article, we will complete the set by looking at the several forms of fixed protection and individual protection introduced at the subsequent reductions in the LTA.

Fixed Protection

The first new form of protection was “fixed protection”, typically now called “fixed protection 2012” (FP 2012) given the introduction of the later forms of fixed protection. This accompanied the reduction in LTA from £1,800,000 to £1,500,000.

It gave the member a protected LTA of £1,800,000, of which 25 per cent could be taken as a tax-free lump sum.

There was no minimum fund value requirement, and members had to submit paper applications to HMRC by 5 April 2012. The member would then receive a certificate confirming their protection.

A member cannot hold FP 2012 if they already hold enhanced protection or primary protection.

Given that the LTA was reduced twice more after 2012, FP 2012 in hindsight has proved to be a very beneficial form of protection.

Losing the protection

In this respect FP 2012 looks similar to enhanced protection.

The member will lose FP 2012 if they contribute to a defined contribution pension or if they accrue benefits in a defined benefit pension. In a world where automatic enrolment is a feature of any workplace, this is something to be alert to.

There are also a few transfer situations that can cause issues.

If a member transfers pension rights to a defined contribution scheme from a defined benefit scheme or from another defined contribution scheme, the protection will remain intact. If they were to transfer to a defined benefit scheme, it would be lost (although there are exceptions).

A member would also lose their protection if they set up a new pension scheme to receive a pension credit from a pension sharing order on divorce. (This is not the case if they transfer the credit to an existing scheme.)

And it is unclear from the legislation as to whether establishing a beneficiary’s drawdown fund when inheriting death benefits would revoke the beneficiary’s FP 2012.

In the event the member does lose their protection, they must notify HMRC within 90 days or they could be subject to fines.

Fixed Protection 2014

Two years later, the LTA was reduced from £1,500,000 to £1,250,000, and “fixed protection 2014” (FP 2014) was introduced.

As the name suggests, this was very similar in nature to FP 2012, and it gave the member a protected LTA of £1,500,000, which meant a maximum tax-free lump sum of £375,000.