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The background of fixed protection

From 6 April 2006 to 5 April 2023, the lifetime allowance (LTA) was a limit on the amount of pension benefits that could be taken without triggering an extra tax charge.

On three occasions during this time, the lifetime allowance (LTA) was reduced. Each time, a version of fixed protection was made available to help people who had pension rights that already exceeded, or were likely to exceed, the reduced LTA. It provided valuable protection against LTA tax charges and could also give a higher tax-free cash entitlement.

* Fixed protection is maintained until such time, if ever, it is lost.

The trade-off was that:

• there could be no ongoing contributions or ‘benefit accrual’
• you couldn't start a new pension arrangement other than to accept a transfer of existing pension rights
• there were some restrictions on pension transfers

Fixed protection was aimed at those whose pension benefits would, or were likely to, exceed the LTA when benefits were taken. But, regardless of fund size or benefit value, anyone could apply for it as long as they didn’t have enhanced protection, primary protection or an earlier version of fixed protection.

It’s no longer possible to register for any of the versions of fixed protection. Unlike FP2012 and FP20214, initially FP2016 had no application deadline. Regardless of when FP2016 was approved, the protection applied retrospectively from 6 April 2016.

The Spring Budget 2023 announced that the LTA would be abolished from 6 April 2024 and that LTA tax charges would not apply for tax year 2023/24. It also announced that, from 6 April 2023, the above restrictions would no longer apply for individuals who registered fixed protection by 15 March 2023 and had not invalidated or revoked it before 6 April 2023.

However, the abolishment of the LTA does not mean that fixed protection is no longer valid. New allowances replaced the LTA and fixed protection is still relevant for the purposes of calculating the individual’s ‘lump sum allowance’ (LSA) and ‘lump sum and death benefit allowance’ (LSDBA). These allowances cap the amount of tax-free lump sums that can be paid during the member’s lifetime and on death.

Taking benefits

If relying on fixed protection when taking benefits, the individual should give their fixed protection reference number to the pension provider or trustees.

For those that have FP2012 or FP2014, this will be on the certificate received from HMRC confirming the protection. For those who applied for FP2016, the reference number was given in response to their online application.  

For all protections, an individual can check their reference number online by signing into their Government Gateway account.

From 6 April 2024

Before any lump sum payments are made, the pension provider or trustees should be given the protection reference number so they know that fixed protection applies, and therefore that the member has a higher LSA and LSDBA. Without this, benefits will be tested against the standard LSA (£268,275) and LSDBA (£1,073,100).

The level of LSA depends on which protection the individual holds:

Tax-free cash of up to 25% of the value of the benefits being crystallised can normally be taken, so long as it doesn’t exceed the individual's available LSA.

In some circumstances the tax-free cash could be more or less than 25%. For example, if the person has scheme-specific tax-free cash protection above 25%, or where tax-free cash is limited because there’s a large GMP liability.

See our guide ‘Tax-free cash and the LSA’ for more detail, including how benefits taken before 6 April 2024 affect the available LSA.

Before 6 April 2024

Before taking benefits (or reaching age 75) under the old rules, the pension provider or trustees should have been given the protection reference number so they knew that fixed protection applied, and therefore that the member had a higher LTA . Without this, benefits would have been tested against the standard LTA.

Tax-free cash of up to 25% of the value of the benefits being crystallised could normally have been taken, so long as it didn't exceed 25% of the available protected LTA.

If benefits above the available LTA were taken before 6 April 2023, the excess was subject to an LTA tax charge. 

Benefits taken after 5 April 2016 but before registering for FP2016

If there were any benefit crystallisation events (BCEs) from 6 April 2016 to 5 April 2024, but before the individual registered for FP2016, the amount of LTA used up should be recalculated. This is because FP2016 is backdated to 6 April 2016, regardless of when it was granted.

The benefit to the individual is that testing against a higher LTA will mean that a lower percentage of the LTA will have been used up by any such BCE. Although the LTA no longer applies, this is still relevant as it can affect the remaining levels of LSA and LSDBA available.

In such circumstances the individual should ask their pension provider or trustees to redo the calculations, quoting their protection reference number.

Death benefits

On death before age 75, certain death benefits must be tested against the relevant allowance in force at the time. Before 6 April 2024 this was the LTA and, from that date, it’s the LSDBA.

Under the old rules, certain pension and lump death benefits were tested against the LTA. If within the LTA, they could be paid tax-free - the main exception to this were DB scheme pensions paid to dependants which were not tested but were instead subject to income tax. If the LTA was exceeded, an LTA charge was due. However, in tax year 2023/24 LTA tax charges did not apply.

From 6 April 2024, the LTA no longer exists, but the LSDBA caps the amount of lump sum death benefits which can be paid tax-free on death before age 75. Lump sum death benefits in excess of the available LSDBA are subject to income tax at the beneficiary’s marginal rate.

The LSDBA is a combined allowance for both lifetime tax-free lump sums and tax-free lump sum death benefits. So, the amount available for lump sum death benefits will be reduced by any tax-free cash amounts the member has taken, including any serious ill-health lump sums.

The level of LSDBA depends on which protection the individual holds:

Any death benefits paid from pensions crystallised before 6 April 2024 are not tested against the LSDBA.

As the name suggests, it only applies to lump sum payments, so any death benefits paid as a pension are not tested. This emphasises the importance of being in the right scheme and getting nominations in place so that beneficiaries have all the death benefit options available and, on death of the member before age 75, can receive the death benefits tax-free. Beneficiary's drawdown avoids LSDBA testing and gives maximum flexibility in how much and when benefits are drawn.

See our guide ‘Lump sum and death benefit allowance’ for more details, including how benefits taken before 6 April 2024 affect the available LSDBA. 

Losing fixed protection

Before 6 April 2023

Fixed protection was normally lost if:

• contributions were made to a defined contribution scheme
• there was ‘benefit accrual’ under a defined benefit scheme
• the individual became a member of a new pension arrangement (unless it was a transfer of your existing rights) or
• the individual made or received certain types of pension transfer (see below)

It's the member's responsibility to tell HMRC if fixed protection has been lost. The member must do this within 90 days of the day on which they could have reasonably been expected to have known they had lost their protection. If the member doesn't do this, they can be liable to an initial penalty of up to £300 for failure to notify and daily penalties of up to £60 per day thereafter. 

If fixed protection was lost, the individual would have reverted back to the standard LTA, unless they also had, or subsequently registered for, individual protection.

From 6 April 2023

Those who had registered for fixed protection by 15 March 2023 (and who didn’t invalidate or revoke it before 6 April 2023) cannot lose their protection. They can now recommence pension funding, make transfers and start new arrangements without fear of invalidating the protection.

Those who registered fixed protection after 15 March 2023 can still lose their protection - the old rules continue to apply.

Benefit accrual

Before 6 April 2023, a condition of maintaining fixed protection was that there was no ‘benefit accrual’ after 5 April 2012 (FP2012), 5 April 2014 (FP2014) or 5 April 2016 (FP2016).

Since 6 April 2023, this no longer applies to individuals who registered for fixed protection by 15 March 2023 and didn’t invalidate or revoke it before 6 April 2023 – they can recommence pension funding without losing their protection. This also gave them the potential to carry forward unused annual allowance from the three tax years before 2023/24 when they were unable to fund their pensions.

However, those who registered fixed protection after 15 March 2023 will lose their protection if they have ‘benefit accrual’.

What 'benefit accrual' means depends on the type of scheme involved.

• Defined contribution (DC) schemes - this normally means no contributions can be paid.
  
  The main exception to this rule is contributions to provide life cover under arrangements in place before 6 April 2006.
  
  
• Defined benefit (DB) or cash balance schemes - it means the benefit value can't increase by more than the ‘relevant percentage’* in any tax year.
  
  The benefit value is 20 x the accrued pension plus any separate tax-free cash.

Benefit accrual can occur for active and deferred members of DB schemes, but once a DB scheme pension is in payment, an increase to the pension won't be classed as benefit accrual.

* The relevant percentage

For many DB scheme members, particularly active members, the relevant percentage will be the higher of:

• any annual increase in CPI (using the September CPI figure from the previous year)
• the relevant statutory increase percentage - this covers statutory increases such as GMP revaluation or revaluation of accrued rights for early leavers

Some schemes include an annual rate of benefit increase within the schemes rules to cover certain situations - such as:

• preserved benefit increases for deferred members
• benefit increases for late retirement
• career average earnings schemes which usually specify an annual uprating percentage for accrued benefits or previous years' pensionable earnings

For members covered by such increases, the relevant percentage will be:

• the annual rate of benefit increase specified in the scheme's rules on:
  
  
  • 9 December 2010 (FP2012)
  • 11 December 2012 (FP2014)
  • 9 December 2015 (FP2016)
  plus the relevant statutory increase percentage.

Contributions to an arrangement in place before 6 April 2012 (FP2012), 6 April 2014 (FP2014) or 6 April 2016 (FP2016) to provide life cover on a DB basis (e.g. a lump sum death benefit of 4 x final salary) is not benefit accrual and won't affect fixed protection. 

Fixed protection and transfers

Individuals who registered fixed protection by 15 March 2023 and still held it on 6 April 2023 can transfer their pensions from 6 April 2023 without fear of losing their protection.

But individuals who register fixed protection after 15 March 2023 can sometimes lose their protection on transfer - care is needed for certain types of transfer, including pension sharing on divorce.

Transfers that don’t affect fixed protection

The following transfers will not affect fixed protection so long as the receiving scheme is either a registered pension scheme or a QROPS.

• DC to DC
• DB or cash balance to DC, unless the transfer payment is not the actuarial value of the pension rights being transferred - for example, where an enhanced transfer is given

Transfers that would result in a loss of fixed protection

• DC to DB or cash balance
• To an unregistered pension scheme or an overseas scheme which is not a QROPS
• DB to DC if the transfer payment is not the actuarial value of the pension rights being transferred – for example, where an enhanced transfer is given
• DB or cash balance to DB or cash balance - unless the transferring scheme is being wound up and the receiving scheme is for the same employment, or the benefits are being transferred as part of a relevant business transfer
• A transfer as a result of a pension sharing order, where a new arrangement is set up to receive pension credit rights directly from the original member's pension.

A transfer from a scheme that’s not a UK registered pension scheme doesn't, in itself, result in the loss of fixed protection. But if a new arrangement is set up to accept the transfer, then fixed protection is lost.

Pension sharing and fixed protection

Fixed protection is not affected if someone becomes subject to a pension debit under pension sharing. But, of course, they can’t rebuild their pension benefits without losing the protection.

Care is needed when giving advice on securing pension credit rights for someone with fixed protection:

• If a new arrangement is set up to accept the pension credit directly from the original member's pension, fixed protection is lost
• But if it’s paid into an existing pension arrangement, fixed protection is not affected. After that, the pension credit rights can normally be transferred to a new arrangement without affecting the protection

Fixed protection and auto-enrolment

Whilst pension funding from 6 April 2023 is no longer an issue for many with fixed protection, those who registered fixed protection after 15 March 2023 still need to be aware that their protection could be lost as a result of an employer auto-enrolling (or auto-re-enrolling) them into a pension scheme - this is particularly relevant when moving to a new employer.

Employers don't have to auto-enrol or auto-re-enrol anyone who they have 'reasonable grounds to believe' has any of the transitional protections. Those with fixed protection should let their employers know as soon as possible.

But even then, the employer is not obliged to treat them differently - it's optional - so those who registered fixed protection after 15 March 2023 may still have to opt-out to avoid losing their protection.

Those who registered fixed protection by 15 March 2023 and had previously notified their employer of their protection, may now wish to let their employer know that they can be enrolled - without fear of losing their protection.