PTM176440 - Lump sum allowance and lump sum and death benefit allowance: Fixed protection: Losing the protection

If you are looking for information about FP prior to 6 April 2024, please see the National Archives.

Due to the similarities in the principles of these three types of protection this guidance covers them all unless otherwise specified, and the three types of fixed protection are referred to collectively on this page as “the fixed protection(s)”.

Member's requirement to tell HMRC if they lose their fixed protection
Keeping the fixed protection when a member joins a new pension scheme
Joining a new arrangement and keeping the fixed protection
Automatic enrolment or auto-enrolment
Making contributions to an arrangement if the individual has any of the fixed protections
Transfers that allow the member to keep their fixed protection
Transfers that will cause an individual to lose their fixed protection
Impermissible transfers that will cause an individual to lose their fixed protection

Losing the protection: Introduction

Paragraph 14, Schedule 18 Finance Act 2011
Paragraph 1, Schedule 22 Finance Act 2013
Paragraph 1 and 8, Schedule 4 Finance Act 2016

A member cannot give up their fixed protection.

An individual that hold a valid fixed protection will be able to accrue new pension benefits, join new arrangements or transfer without losing this protection provide the protection was applied for before 15 March 2023, and a certificate or reference number subsequently issued from 6 April 2023.

For those individual’s that applied on or after 15 March 2023 and was subsequently issued a certificate or reference may lose their protection if any of the following occur:

• They have benefit accrual under a registered pension scheme or a relieved non-UK pension scheme (see PTM176450 for more information on what benefit accrual means),
• There is a impermissible transfer into any arrangement they have in a registered pension scheme
• There has been a transfer of sums and assets in an arrangement they have under a registered pension scheme that is not a permitted transfer; or
• They have made a new arrangement under a registered pension scheme other than in permitted circumstances.

Once the fixed protection is lost, all subsequent relevant benefit crystallisation events in relation to a member are tested by using the unprotected lump sum allowance and lump sum death benefit allowance amounts.

As of 6 April 2024, the below guidance is for individual’s that applied on or after 15 March 2023 and were subsequently issued a certificate or reference.

Member's requirement to tell HMRC if they lose their fixed protection 

The Registered Pension Schemes (Enhanced Allowances Transitional Protection) Regulations 2011 – SI 2011/1752
The Registered Pension Schemes and Relieved Non-UK Pension Schemes (Enhanced Allowances Transitional Protection) Regulations 2013 – SI 2013/1741
Paragraph 17 Schedule 4 Finance Act 2016
Section 98 Taxes Management Act 1970

A member is responsible for telling HMRC that their fixed protection no longer applies. The member must do this within 90 days of the loss of FP12 or, for FP14 and FP16 within 90 days of the day on which they could first reasonably be expected to have known they had lost their protection.

If the member does not do this then they will be liable to penalties of up to £300 for failure to notify and daily penalties of up to £60 per day after the initial penalty is raised.

Keeping the fixed protection when a member joins a new pension scheme 

Paragraph 14(4)(d and (1) Schedule 18 Finance Act 2011
Paragraph 13)(d) and (9) Schedule 22 Finance Act 2013
Paragraph 3(d) Schedule 4 Finance Act 2014
Paragraph 12(2A) – (2C) Schedule 36 Finance Act 2004

An individual can only join a new pension scheme and keep their fixed protection if joining that new pension scheme is under ‘permitted circumstances’. See the next section for more information on permitted circumstances.

The most common of the permitted circumstances is when the reason for joining the new scheme is to receive a transfer of pension rights from another pension scheme. To keep the fixed protection the transfer must be a ‘permitted transfer’. So, for example, an individual could transfer benefits from one personal pension scheme into a new personal pension scheme. As long as no contributions are paid to the new personal pension scheme then the individual will be able to keep their fixed protection.

See below for more information on which transfers can be made without causing loss of fixed protection.

Joining a new arrangement and keeping the fixed protection

Paragraph 14(4)(d and (1) Schedule 18 Finance Act 2011
Paragraph 13)(d) and (9) Schedule 22 Finance Act 2013
Paragraph 3(d) Schedule 4 Finance Act 2014
Paragraph 12(2A) – (2C) Schedule 36 Finance Act 2004

If a member joins a new arrangement in a new, or in their registered pension scheme they will keep their fixed protection if the reason for joining the new arrangement is:

• To receive a permitted transfer,
• As part of a retirement-benefit activities compliance exercise, or
• As part of an age-equality compliance exercise.
  

If they join a new arrangement for any other reason the fixed protection will be lost at the point the new arrangement is made. This will be the case even though there can be no ‘benefit accrual’ for the fixed protection’s purposes under the new arrangement.

A new arrangement is an arrangement that is new to the individual. In other words they were not previously a member of the arrangement. The arrangement can be one that has previously been in existence for other members and can be either in the same pension scheme or in a different pension scheme.

Whether or not someone joins a new arrangement is a question of fact and will be influenced by the design of the scheme. It is possible for a scheme to have more than one arrangement of the same type, e.g. two defined benefits arrangements, for the same person.

When an individual starts to accrue a new type of benefit under the scheme this must be via a new arrangement. For example, a member being provided with only defined benefits under a scheme but who then starts to build up money purchase (defined contribution) benefits will become a member of a new money purchase arrangement and so would lose their fixed protection.

Automatic enrolment or auto-enrolment

Some employers automatically put their employees into their pension scheme. Under the provisions of Pensions Act 2008 some employers are subject to the automatic enrolment duty and are required to auto-enrol their employees into a pension scheme.

For any of the fixed protections, the considerations are the same as for enhanced protection (see PTM176340).

Making contributions to an arrangement if the individual has any of the fixed protections

If an individual with any of the fixed protections, their employer or someone else (on their behalf) makes contributions to an other (i.e. non-cash balance) money purchase arrangement, the individual will lose their fixed protection.

They may be able to make further contributions to a defined benefits arrangement or cash balance arrangement. But the way that benefits are calculated for these types of arrangement may mean that there is benefit accrual if the member’s benefits increase by more than the relevant percentage. If that is the case, they will lose their protection.

See PTM176470 for more detail on when making contributions may lead to loss of fixed protection.

Transfers that allow the member to keep their fixed protection

Paragraph 14(4)(c) and (9) Schedule 18 Finance Act 2011
Paragraph 1(3)(c) and (8) Schedule 22 Finance Act 2013
Paragraphs 3(c) and 6 Schedule 4 Finance Act 2016
Paragraph 12(7) – (8B) Schedule 36 Finance Act 2004

A transfer of rights for an ex-spouse to another scheme following a pension sharing order may still be made. Such a transfer does not affect the fixed protection of the individual whose rights are being reduced under the pension sharing order.

When transferring benefits, to keep fixed protection the transfer must be a permitted transfer. The following transfers are permitted transfers and will not cause loss of the fixed protection.

1. A transfer of pension rights from an other (i.e. non-cash balance) money purchase arrangement to another other money purchase arrangement. The money purchase arrangement receiving the transfer must be held under either a registered pension scheme or a recognised overseas pension scheme.
2. A transfer from a cash balance arrangement or defined benefits arrangement to an other money purchase arrangement (i.e. non-cash balance) under a registered pension scheme or a recognised overseas pension scheme. The value of the sums and assets received by the other money purchase arrangement must be actuarially equivalent to the rights being transferred, or
3. A transfer from a cash balance arrangement or defined benefits arrangement to another defined benefits or cash balance arrangement if the transfer is made because:
   • the pension scheme making the transfer is winding-up (see below) and the receiving cash balance or defined benefits arrangement relates to the same employment as the transferring arrangement, or
   • the transfer is made because the individual’s employer has sold all or part of the business. The legislation refers to this as a relevant business transfer, or
   • the transfer is made as part of a retirement-benefit activities compliance exercise. 

A transfer made in connection with a winding-up

To be a permitted transfer, a transfer must be made in connection with the winding up of the pension scheme making the transfer. Whether or not a particular transfer meets this requirement is a question of fact. Where a decision is made to wind up a scheme and transfers are then made to facilitate the winding-up but before the winding-up process formally starts or is completed, HMRC will normally accept that the transfer is made in connection with the winding-up of the scheme unless there is evidence to the contrary. But where a decision to make a transfer occurs before the decision is taken to wind up the scheme, for example because the employer subsequent to the transfer decides to wind up the scheme in relation to the remaining members, then the transfer will not have been made in connection with the winding-up, although any other transfers made subsequent to the winding-up decision being taken may satisfy the condition.

Although not a requirement, it may be beneficial if the scheme administrator of the transferring scheme kept copies of any document evidencing that the intention to wind the scheme up pre-dated the decision to make the transfer.

When a pension scheme going into the Pension Protection Fund is treated as having been wound up by section 161(2) Pensions Act 2004, HMRC accept that this amounts to the winding up of the scheme.

The receiving arrangement must relate to the same employment 

To be a permitted transfer, the receiving arrangement must relate to the same employment as the transferring arrangement that is being wound up. HMRC will treat this requirement as being met where a transfer has been made in accordance with either regulation 12(2)(a) or regulation 12(2)(b) of the Occupational Pension Schemes (Preservation of Benefits) Regulations 1991 SI 1991/167.

Partial winding-up

A scheme may have several employers participating in a scheme. Where an employer ceases to participate and leaves the scheme securing all the member’s rights from that employment outside the scheme, e.g. by transfer or annuity purchase, such a partial winding-up will constitute a scheme winding-up for the purposes of these provisions subject to all of the following requirements being met:

• there is a registered pension scheme which is an occupational pension scheme
• the occupational pension scheme comprises a number of different sections
• the scheme rules provide for individual sections to be wound up
• each section operates in respect of a particular employer participating in the scheme,
• if an employer has more than one section under a pension scheme all the sections relating to that employer must be wound up
• the winding up means that the employer’s entire participation in the scheme ceases.

Transfers that will cause an individual to lose their fixed protection

Paragraph 14(4)(c) and (9) Schedule 18 Finance Act 2011
Paragraph 1(3)(c) and (8) Schedule 22 Finance Act 2013
Paragraphs 3(c) and 6 Schedule 4 Finance Act 2016
Paragraph 12(7) – (8B) Schedule 36 Finance Act 2004

An individual will lose their fixed protection if a transfer is made:

• to a scheme that is not a registered pension scheme or a recognised overseas pension scheme
• from an other money purchase arrangement (i.e. non-cash balance) to either a cash balance arrangement or a defined benefits arrangement
• from a cash balance or defined benefits arrangement to another cash balance or defined benefits arrangement where the transfer is not made because:
  • the transferring scheme is winding up (see previous section), or
  • the transfer is not made as part of a retirement-benefit activities compliance exercise or a relevant business transfer. In other words, their employer has sold all or part of their business and the member’s benefits are being transferred to their new employer’s scheme.

Impermissible transfers that will cause an individual to lose their fixed protection

Paragraph 14(4)(b) and (8) Schedule 22 Finance Act 2011
Paragraph 1(3)(b) and (7) Schedule 22 Finance Act 2013
Paragraphs 3(b) and paragraph 5 Schedule 4 Finance Act 2016
Paragraph 17A Schedule 36 Finance Act 2004

A transfer, or other action, that is defined as an impermissible transfer causes the fixed protection to be lost.

The following are impermissible transfers into a money purchase arrangement that is not a cash balance arrangement (i.e. an other money purchase arrangement):

• a transfer of sums or assets from an arrangement under a registered pension scheme not relating to the individual. However, a transfer pursuant to a pension sharing order is not an impermissible transfer and will not cause the loss of fixed protection.
• a transfer of sums or assets which were held otherwise than by a pension scheme.
• the payment of a transfer lump sum death benefit into the arrangement. (A transfer lump sum death benefit could only be paid in respect of a member who died before 6 April 2007).

There is an impermissible transfer if there has been a transfer or payment of the type specified above to a hybrid arrangement and that hybrid arrangement later becomes and other money purchase arrangement.

There is an impermissible transfer if a defined benefits arrangement or a cash balance arrangement for an individual becomes and other money purchase arrangement for that individual under that scheme.