PTM176310 - Lump sum and lump sum and death benefit allowance: Enhanced protection: Overview
If you are looking for information about protections, lifetime allowance and the lifetime allowance charge pre-April 2024 please see National Archives.
Introduction
Enhanced protection with primary protection
Cessation of enhanced protection
Notification to HMRC
Penalties
Transfers and enhanced protection reporting requirements
Transfers and the permitted maximum
Introduction
Individuals who had certain rights at 5 April 2006 could apply to HMRC for enhanced protection (EP) to protect them from the lifetime allowance charge when those rights came into payment after 5 April 2006.
Individuals could claim enhanced protection regardless of their value of their pension rights at 5 April 2006. Individual’s that had valid enhanced protection were not liable to the lifetime allowance charge on any benefit crystallisation event and could not take a lifetime allowance excess lump sum. An individual could protect their pension rights plus any separate lump sum rights.
As of 6 April 2024, lifetime allowance has been abolished, but an individual is entitled to have their lump sum allowance and lump sum death benefit allowance protected.
Lump sum allowance with EP
For an individual with enhanced protection, but no lump sum protection, their lump sum allowance will be £375,000. When an individual has a relevant benefit crystallisation event (see PTM173000) the lump sum will then be deducted from the lump sum allowance – anything in excess of £375,000 will be subject to income tax at the individual’s marginal rate.
Lump sum and deathh benefit allowance with EP
The individual’s lump sum death benefit allowance will be the amount equal to the value of their uncrystallised pension rights on 5 April 2024. When an individual has a relevant benefit crystallisation event the lump sum will be deducted from the lump sum death benefit allowance – anything in excess of the value of their uncrystallised pension rights on 5 April 2024 will be subject to income tax at the individual’s marginal rate.
If an individual had any benefit crystallisation events occur prior to 6 April 2024 then they will need review the transitional calculations with enhanced protection at PTM174400.
Enhanced protection with primary protection
Individuals with pension rights valued at more than £1.5 million on 5 April 2006 could have notified HMRC that they wished to claim both enhanced protection and primary protection. Where they did the claim for enhanced protection took precedence – the individual’s protection will operate on an enhanced protection basis unless it is lost.
Where enhanced protection ceases the individual’s protection defaults to primary protection, you can read more about primary protection at PTM176210.
Cessation of enhanced protection
An individual with valid enhanced protection prior to the 15 March 2023 can accrue benefits, transfer or join new arrangements without risk of losing their protection.
For enhanced protection certificates issued on or after the 15 March 2023, the rules for enhanced protection vary and the individual can have a cessation event occur. For more information about cessation events please see PTM176340.
Notification to HMRC
To claim enhanced protection an individual must have notified HMRC of their intention to rely on this protection. The notification must have been made on or before the 5 April 2009, and not before 6 April 2006.
On receipt of the form, HMRC processed the form and issued a certificate with a unique reference number to the individual. Valid late applications can still be made.
Guidance on the notification process can be located on the National Archives.
Penalties
Section 261 Finance Act 2004
An individual who fraudulently or negligently provides false or incorrect information or documents in connection with a notification may be liable to a penalty.
Transfers and enhanced protection reporting requirements
Regulation 14ZC The Registered Pension Schemes (Provisions of Information) Regulations 2006 SI 2006/567
The scheme administrator of the transferring scheme must provide the scheme administrator of the recipient scheme with a statement stating, for each arrangement under the transferring scheme relating to the member, the amount that would be the "permitted maximum" in relation to each of hte following lump sums if a lump sum of that description were paid to or in respect of a member under the arrangement:
- A pension commencement lump sum,
- A serious ill health lump sum,
- An uncrystallised funds pension lump sum,
- A defined benefits lump sum death benefit,
- A pension protection lump sum death benefit,
- An annuity protection lump sum death benefit,
- A drawdown pension fund lump sum death benefit, and
- A flexi- access drawdown lump sum death benefit.
Transfers and the permitted maximum
Where it is necessary to determine the permitted maximum in relation to a pension commencement lump sum paid after 5 April 2023 under the arrangement (known as the paying arrangement), and one or more recognised transfers were made after the post-5 April 2023 period and any sums and assets applied for the provision of the lump sum were held for the purposes of another arrangement under a different registered pension scheme (known as a predecessor arrangement) then the following applies.
The permitted maximum of a pension commencement lump sum that could have been paid on 5 April 2023, under the paying arrangement, is the maximum amount of a pension commencement lump sum that could have been paid on that date under the predecessor arrangement, less the aggregate of each pension commencement lump sum that the member has become entitled to under the paying arrangement and previously become entitled to under the predecessor arrangement.