RPSM03201020 - Member Pages: Protecting pension rights from tax charges: Types of protection available: Primary protection

What is primary protection?

If the total value of your pension rights is greater than £1.5 million at 5 April 2006, you can register for primary protection. This will protect the value of your pension rights on 5 April 2006 in relation to the lifetime allowance charge. You cannot have primary protection if the value of your pension rights on 5 April 2006 is £1.5 million or less.

Protection of your pension rights will be achieved by giving you a higher personal lifetime allowance than the standard lifetime allowance. Once registered your individual lifetime allowance will be increased in line with increases to the standard lifetime allowance.

The value of your pension rights on 5 April 2006 is converted into a factor based on the standard lifetime allowance of £1.5 million for the tax year 2006/07.

Example

Fred has pension rights worth £3 million on 5 April 2006. This is twice the standard lifetime allowance for 2006/07 of £1.5 million. Fred is given an enhanced lifetime allowance factor of ‘+1’. This means Fred has a personal lifetime allowance of 1 x standard lifetime allowance plus his extra amount of 1 x standard lifetime allowance, i.e. Fred’s personal lifetime allowance is twice the standard lifetime allowance. As the value of the standard lifetime allowance increases so will the value of Fred’s personal lifetime allowance.

Fred takes benefits when the standard lifetime allowance is £2 million. His personal lifetime allowance is now worth £4 million (2 x the standard lifetime allowance of £2 million). Any benefits crystallising up to the value of £4 million will be protected from the lifetime allowance tax charge.

If Fred had pension rights of £4.5 million come into payment, he would be liable for a lifetime allowance charge on the excess over £4 million (so on £500,000). The charge would be at the rate of 25% of £500,000 if taken as pension (tax of £125,000) or at the rate of 55% if the £500,000 were taken as a lump sum (£275,000). Where the excess is paid as a pension, that pension will be taxed at Fred’s marginal rate of tax.

If Fred had not taken steps to protect his pension rights at all, he would be liable for the lifetime allowance charge on the entire excess over the standard lifetime allowance. If as in this example the benefits taken were valued at £4.5 million and the standard lifetime allowance was £2 million, he would be liable for the lifetime allowance charge on £2.5 million. This means tax of £625,000 if the £2.5 million was taken as pension, or tax of £1.375 million if the £2.5 million was taken as a lump sum.

Is there anything else I need to know about primary protection?

If you have claimed primary protection you may:

  • continue to accrue or build up rights under any registered pension scheme after 5 April 2006, and
  • continue to pay contributions to a registered pension scheme after 5 April 2006, including contributions made on your behalf by your employer.

You cannot give up primary protection and except in limited circumstances (see RPSM03201021 for more information) the level of your primary protection will not change.

Glossary ( RPSM20000000)