Although one aim of pensions simplification was to replace...
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...ng, at least to some extent, rights built up before A-Day.
Enhanced protection was available to everyone with pre A-Day benefits irrespective of the value of their pension rights. An election for enhanced protection fully protected an individual against the lifetime allowance charge regardless of how their...
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...the lifetime allowance, scheme members with enhanced protection have, from 6 April 2023, been permitted to recommence benefit accrual without suffering the loss of their protection. This applies to both defined benefit and defined contribution members.
Only individuals with pension rights valued at more than £1.5m on 5 April 2006 could apply for primary protection. An election for primary protection gave an individual a personal LTA that was larger than the standard LTA and allowed contributions to continue or benefits to continue to build-up after A-Day. This gave increased protection against the LTA charge but the charge still arose if the crystallised value of benefits when they were taken exceeded the personal LTA. For example, money purchase funds that grew at a higher percentage rate between A-Day and taking benefits than the percentage increase in the LTA (taking into account the underpinned lifetime allowance) would be subject to a LTA charge at crystallisation. An LTA charge could also occur for members of defined benefit schemes if benefits were augmented by the scheme.
The primary protection factor
The primary protection factor is the increase to the standard LTA. The factor is calculated as:
(A-Day benefit value - &poun...
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...with dormant primary protection. The primary protection would only become active if the enhanced protection is lost.
Losing primary protection
An individual cannot voluntarily give up primary protection. The only way that primary protection can be lost is if a pension share on divorce has the effect of reducing the individual’s personal LTA below 100%.
This arises where a pension debit on divorce is awarded against an individual who has primary protection and the amount of the debit is deducted from the value of their benefits at 5 April 2006. If the value then goes below £1.5m (the standard LTA in 2006/07), primary protection is lost. If it does not fall below £1.5m, the factor is recalculated with effect from that date though it does not affect BCEs that may have already taken place between 5 April 2006 and the date of the debit.
Where an individual applied for both enhanced and primary protection, which of them took priority?
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The maximum pension commencement lump sum (tax-free cash) since A-Day is 25% of the value of benefits. At A-Day this equated to a maximum pension commencement lump sum (PCLS) of 25% x £1.5m = £375,000 and in 2023/24, it has reduced to 25% of £1,073,100, i.e. £268,275.
There are, however, three types of PCLS rights that can be given transitional protection:
Where a member elected for primary protection, any PCLS entitlement of more than £375,000 also had to be registered for primary protection. The member's PCLS entitlement is calculated as at 6 April 2006 and this amount will be increased each year in line with increases in the LTA.
Primary protection example
Dennis has a registered PCLS of £500,000 under primary protection. He decides to crystallise his benefits in 2023/24 when the LTA is £1,073,100. The maximum PCLS Dennis can take is £600,000, i.e. £500,000 x (£1.8m/£1.5m). Even though the LTA has reduced to £1,073,100, the £1.8m underpinned LTA is still ...
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...s a block transfer. This can be when either:
Two or more members transfer from the scheme with the protected PCLS to another pension scheme at the same time. The member must not have been a member of the receiving scheme for more than a year at the date of transfer, or
There is a transfer to an individual pension contract (e.g. a Section 32 buyout contract) or assignment of a member's policy on the wind-up of the scheme
Some pre A-Day members of occupational pension schemes were entitled to a PCLS equal to their fund value. The whole of their fund can now be taken as a lump sum provided they have had no relevant benefit accrual (see section on enhanced protection) and they didn't have lump sum protection with enhanced or primary protection. The lump sum must be taken in a single transaction.
Which type of pre A-Day pensions could have built up a pension commencement lump sum entitlement of greater than 25% of the value of pension benefits and therefore benefit from scheme specific protection?
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