PTM176450 - Lump sum and lump sum and death benefit allowance: Fixed protection: Benefit accrual

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 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 ‘fixed protections’. 

The below guidance is for individuals that made a valid application for fixed protection on or after 15 March 2023. Those that made a valid application for fixed protection prior to this date can accrue benefits without losing their protection.

What is benefit accrual
Benefit accrual under a money purchase arrangement that is not a cash balance arrangement
Benefit accrual under a cash balance arrangement
Valuation assumptions for benefit accrual under a cash balance or defined benefits arrangement
Benefit accrual under a hybrid arrangement
Benefit accrual under an annuity contract
Benefit accrual under an arrangement for an individual who is a relieved member of a relieved non-UK pension scheme

What is benefit accrual 

Paragraph 14(4)(a), (4A) to (7) and (11) to (14D) Schedule 18 Finance Act 2011
Paragraph 1(3)(a), (4) to (6) and (10 to (21) Schedule 22 Finance Act 2013
Paragraph 3(a) and 4 Schedule 4 Finance Act 2016

If an individual has benefit accrual they lose their fixed protection on the day that benefit accrual occurs.

The rules for when benefit accrual occurs vary depending on which type of pension arrangement the member has. If a member has a number of pension arrangements and has benefit accrual under just one of them, they lose their fixed protection for all of their pension savings.

Benefit accrual under a money purchase arrangement that is not a cash balance arrangement 

Paragraph 14(4)(a), 14(5)(a) and (c), and 14(11) Schedule 16 Finance Act 2011
Paragraph 1(3)(a), 1(4)(a) and (c), and 1(10) Schedule 22 Finance Act 2013
Paragraph 4(1)(a) and (c), and 4(4) Schedule 4 Finance Act 2016
Paragraph 14 Schedule 36 Finance Act 2004

For an other money purchase arrangement (or a hybrid arrangement where the benefits to provide may be other money purchase benefits), benefit accrual happens if a relevant contribution is paid under the arrangement in respect of the member.

Any of the following are relevant contributions:

  • a relievable pension contribution - a contribution paid by the member or paid by someone else, other than the member’s employer, on behalf of the member (for more information about relievable pension contributions generally, see PTM044100),
  • a contribution paid by the member’s employer in respect of the member,
  • a contribution paid (but not paid by the member or someone else on behalf of the member or by the member’s employer) in respect of the member that is subsequently allocated to the member under the arrangement.

The following contributions are not relievable pension contributions:

  • contracted-out rebates and minimum contributions paid into an other money purchase arrangement by HMRC in relation to contracted-out periods prior to 6 April 2012 for FP12, 6 April 2014 for FP14 and 6 April 2016 for FP16
  • contributions paid by the member or someone else (other than their employer) in respect of the member after the member has reached age 75
  • life assurance premium contributions
  • contributions made to an arrangement, in circumstances where the arrangement becomes an other money purchase arrangement after the relevant date from which ‘no contributions to other money purchase arrangement rule’ has come into effect.

The following do not trigger loss of the fixed protection:

  • minimum payments under section 8 of The Pension Schemes Act 1993 (c.48) or section 4 of The Northern Ireland Act 1993 (c.49) or any amount recovered under regulations made in connection therewith - where such payments were being made before the 6 April date on which the fixed protection first became available they may continue
  • certain contributions that are used to provide life cover under a policy of insurance on the life of the individual, that existed before 6 April 2006 do not count as relevant contributions, specifically where:
    • there is no right to surrender any rights under the policy
    • the terms of the policy are not varied significantly (and any exercise of rights conferred by the policy is to be regarded for this purpose as a variation) during the period beginning with 6th April 2006 and ending with the individual’s actual death so as to increase the benefits payable under the policy or extend the period during which benefits are so payable, and
    • no benefits are paid, or other payments made, under (or on the surrender of rights under) the policy except by reason of the individual’s death

The payment of compensation into an other money purchase arrangement could be a relievable pension contribution and would trigger loss of protection. Whether it does depends on the nature of the compensation. PTM044100 explains when compensation is a relevant contribution that triggers loss of protection.

The normal rules apply for determining the day on which a contribution is paid when considering whether benefit accrual has occurred.

Benefit accrual under a cash balance arrangement 

Paragraph 14(5)(b), 6(a) and (7) schedule 18 Finance Act 2011
Paragraph 1(3)(a), (4)(b), (5)(b) and (6) schedule 22 Finance Act 2013
Paragraph 4(1)(b) and (c), (2), (3) and (5) to (8) schedule 4 Finance Act 2016

To see if a member has had benefit accrual in a defined benefits arrangement (or hybrid arrangement where there may be defined benefits), the member’s rights under the arrangement should be tested to see if the increase in benefits amount is more than the ‘relevant percentage’.

If, from 6 April 2012 for FP 2012, 6 April 2014 for FP 2014 or 6 April 2016 for FP 2016, the increase in the benefits amount in any tax year is more than the ‘relevant percentage’ there has been benefit accrual and protection is lost.

The benefits amount is:

(P x RVF) + LS

where:

  • LS is the lump sum (other than by commutation of pension) that the member would be entitled to under the valuation assumptions
  • P is the annual rate of pension that the member would be entitled to under the valuation assumptions
  • RVF is the relevant valuation factor. The relevant valuation factor is 20 unless (exceptionally) a scheme has agreed a higher factor with HMRC.

For more information on benefit accrual in defined benefit arrangements you can read more about this in the National Archives website.  

Valuation assumptions for benefit accrual under a cash balance or defined benefits arrangement

Section 277 Finance Act 2004

When calculating whether there has been an increase in rights available for the provision of benefits in a cash balance arrangement or in the benefits amount for a defined benefits arrangement, the member’s rights are valued as the amount that the member would be entitled to receive on the date of the test, subject to 2 valuation assumptions. These are that:

  • the benefit should be calculated assuming the individual to be the age at which no reduction would apply to the payment of an immediate benefit
  • the individual is deemed to be in good physical and mental health at the time of the test.

Benefit accrual under a hybrid arrangement 

Paragraph 14(4A) to (4E) and (19) schedule 18 Finance Act 2011
Paragraph 1(3)(a), 4(c), 5(a), 5(b) and (6) schedule 22 Finance Act 2013
Paragraph 4(1)(c) and (2) to (8) schedule 4 Finance Act 2016

For a hybrid arrangement, when and how benefit accrual occurs depends on the options available under the arrangement.

If one of the possible benefits that could be provided under the arrangement is an other (that is, non-cash balance) money purchase benefit, benefit accrual occurs after 5 April 2012 for FP 2012, 5 April 2014 for FP 2014 or 5 April 2016 for FP 2016 on the earlier of:

  • the payment of a relevant contribution

  • an increase in benefits of more than the ‘relevant percentage’

If the only possible benefits under the hybrid arrangement are defined benefits and cash balance benefits, benefit accrual occurs when benefits increase by more than the ‘relevant percentage’.

Benefit accrual under an annuity contract

Paragraph 14(13), (14), (14B) and 14(C) schedule 18 Finance Act 2011
Paragraph 1(3)(a) and (15) to (17) schedule 22 Finance Act 2013
Paragraph 4(1)(b) and (9) to (11) schedule 4 Finance Act 2016
Section 153(8) Finance Act 2004

The tax rules treat a deferred annuity contract (including what are commonly known as a section 32 policy, a buyout policy and an assigned policy) as a registered pension scheme where, on or after 6 April 2006, funds have been transferred to the contract or policy to secure benefits and those funds have come from a registered pension scheme. The deferred annuity contract automatically becomes a registered pension scheme on the day when the contract is made, or a policy is assigned.

If there is benefit accrual in relation to the rights under the contract or policy, the fixed protection is lost.

Benefit accrual occurs in the same way as it would have done had the funds remained in the original pension scheme, so the above guidance on benefit accrual applies depending on the type of arrangement involved. Where the arrangement was defined benefits, the ‘relevant percentage’ is the higher of any annual rate of increase in the rights during the tax year which is specified in the contract (provided that this rate is no more than the percentage increase in the retail prices index over a 12-month period specified in the contract), and the relevant statutory increase percentage. If the member’s rights increase at a higher rate, there is benefit accrual and the fixed protection is lost.

Benefit accrual under an arrangement for an individual who is a relieved member of a relieved non-UK pension scheme

For an individual with any of the fixed protections who is a relieved member of a relieved non-UK pension scheme, from 6 April 2013 for FP 2012, 6 April for FP 2014 and 6 April 2016 for FP 2016, they are treated as though they were a member of a registered pension scheme. Benefit accrual leading to the loss of the fixed protection can occur in relation to their arrangement or arrangements under the relieved non-UK scheme.

See PTM113410 for definitions of a ‘relieved member’ and a ‘relieved non-UK pension scheme’. The test for benefit accrual in relation to such arrangements differs according to whether or not there has been a payment of a pension or lump sum.

Where there has not been a payment during the tax year, there is benefit accrual if, in relation to the arrangement in the relieved non-UK pension scheme, there is a pension input amount under sections 230 to 237 Finance Act 2004 as applied by schedule 34 of Finance Act 2004 greater than nil for any tax year. See PTM053000 for more detail about pension input amounts.

Where this happens, benefit accrual is treated as occurring (and the fixed protection is lost) at the end of the tax year in question.

Where:

  • there has been a benefits payment in relation to any arrangement for the individual under any pension scheme during the tax year, and

  • there would have been a pension input amount greater than nil in relation to the arrangement in the relieved non-UK pension scheme had that tax year ended immediately before the BCE took place,

there is benefit accrual and fixed protection is lost. The benefit accrual is treated as having occurred immediately before the pension or lump sum payment occurs. In the case of a relevant lump sum payment, the fixed protection has been lost before the payment occurs, therefore the standard lump sum and lump sum and death benefit allowances apply at the time of a lump sum payment instead of the protected allowances.