Enhanced protection
Enhanced protection was one of the original forms of LTA protection offered following A-Day’s introduction of pension simplification rules. Anyone could, after April 5 2006, apply for enhanced protection.
If they did then they would never face a LTA tax charge, regardless of the final value of their pension, but in return they could not have any further “relevant benefit accrual” in the pension scheme through contributions or building up benefits in a defined benefit scheme.
Individuals did not need to have more than £1.5mn in their pension fund to apply for enhanced protection. So it suited those who could just easily stop contributing and allow investment growth to propel their pension fund upwards.
If the member had a tax-free cash entitlement of more than £375,000 on April 5 2006, then their protection certificate included the percentage of their fund they could take as tax-free cash. This percentage could be more or less than 25 per cent.
HMRC has now confirmed that the maximum amount of tax-free cash these members will be able to take will be the lower of:
- the protected percentage of their fund when they take benefits; and
- their entitlement on April 5 2023.
This makes sense. Otherwise, as it is calculated as a percentage of the final fund, once the member restarts contributions their tax-free cash entitlement would go shooting up in value — and that would go against the spirit of the new regime.
Below is an example of how it works:
If on applying for enhanced protection, the member’s tax-free cash entitlement was less than £375,000, then there would not be a specific pension commencement lump sum percentage on the protection certificate.
For these members, their tax-free cash is calculated as the lower of:
- 25 per cent of their current fund; or
- 25 per cent of £1.5mn.
This rule carries on into the new tax year.
Fixed protection
As the LTA tumbled in value during the 2010s, there were three different opportunities for members to protect their higher LTA through fixed protection — in 2012, 2014 and 2016.
On these occasions an individual applying for fixed protection got to keep the higher LTA and higher tax-free cash entitlement, but generally only as long as they stopped contributing or stopped building up benefits in a DB scheme.
Protected LTA | Maximum PCLS | |
Fixed protection 2012 | £1.8mn | £450,000 |
Fixed protection 2014 | £1.5mn | £375,000 |
Fixed protection 2016 | £1.25mn | £312,500 |
From April 6 2023, fixed protection members can “break” these protection rules and restart contributions to their pension, while keeping their tax-free cash protection. This is as long as they had already applied for their fixed protection before March 15 2023.
Primary and individual protection
Pension scheme members may have also had the choice of opting for primary (2006 only) or individual protection (2014 and 2016).
To apply for these protections, their pension value had to be above a certain amount. They could apply to protect their pension value at this amount and carry on contributing to their pension or building up benefits in a DB scheme and keep their protection. Their tax-free cash would also be protected at 25 per cent of their protected LTA.
