RPSM03201030 - Member Pages: Protecting pension rights from tax charges: Types of protection available: Enhanced protection

What is enhanced protection?

Protection from a potential lifetime allowance charge is available for individuals with pension rights at 5 April 2006 whether they are valued at more than £1.5 million or not. This is known as enhanced protection.

It is a means to protect pension rights built up before 6 April 2006 from the lifetime allowance charge when those rights crystallise after that date.

You may wish to consider registering for enhanced protection if you think that by the time you take all your benefits the value may be more than the level of the standard lifetime allowance at that time. An example of this would be if you thought that the investments underlying your pension rights in a money purchase arrangement were to grow at a faster rate than the increase in the standard lifetime allowance.

This will mean that your benefits can be paid without checking whether the standard lifetime allowance is exceeded and there will be no lifetime allowance charge on the amount paid even if it does in fact exceed that figure.

Example

Your rights are valued at £1.2 million at 5 April 2006. This means you could not apply for primary protection because your rights do not exceed £1.5 million (the standard lifetime allowance at 6 April 2006).

However, you do not intend to take your benefits until 6 April 2010. The standard lifetime allowance at that time will be £1.8 million. You think that your pension rights will be worth more than £1.8 million at that date.

If you do not register for enhanced protection and your rights are worth £2 million when you take them on 6 April 2010, you are liable to a lifetime allowance charge on £200,000. If the £200,000 is taken as pension, the tax charge is £50,000. Where the excess is paid as a pension that pension will be taxed at your marginal rate. If taken as a lump sum, the tax charge is £110,000.

If you do register for enhanced protection there will be no lifetime allowance charge. The entire £2 million fund can be used to pay your benefits.

Is there anything else I should know about enhanced protection?

Benefits paid whilst you have enhanced protection will not be liable to the lifetime allowance tax charge.

You cannot make contributions to a money purchase arrangement after 5 April 2006, neither can your employer make contributions to provide you with benefits. Although you can still accrue benefits under a defined benefits or cash balance arrangement the permitted level of benefit accrual is limited. RPSM03201031 provides more details.

Enhanced protection will cease to apply in certain circumstances and you can give up enhanced protection - see RPSM03203010.

If you have both primary and enhanced protection enhanced protection takes precedence over primary protection. You must lose or give up enhanced protection to be able to use your primary protection.