RPSM03200020 - Member Pages: Protecting pension rights from tax charges: What is protection?

What is meant by protection?

The tax rules for pensions changed on 6 April 2006. The new rules on the taxation of pension benefits include

  • Benefits should not be paid before you are age 55 (age 50 before 6 April 2010)
  • Where the total value of all your pensions in payment is more than the lifetime allowance (which in the tax year 2006/07 is £1.5 million) any pensions above that amount will be subject to a tax charge. If the amount above the lifetime allowance is used to give you a pension the tax rate will be 25%. The tax rate is 55% if you take the excess over the lifetime allowance as a lump sum.
  • The amount of the tax free lump sum will be limited to 25% of the value of the pension fund providing your benefits.

Before 6 April 2006 some people had the right to

  • take pension benefits before age 55, or
  • pension rights worth more than £1.5 million, or
  • a lump sum of more than 25% of the value of the pension fund.

It is possible to protect these existing pension rights from some of the tax charges in place from 6 April 2006.

This guidance tells you what kinds of protection are available and what you may need to do.

What are my pension rights that may need to be protected?

Your pension rights for these purposes are the total of two elements. These are

  • any pensions and annuities already being paid to you on 5 April 2006 that are benefits from tax approved pension schemes, and
  • the right to receive a benefit in the future from tax approved pension schemes where those benefits have not yet come into payment.

It is the cost of providing these rights, not your annual rate of pension that is compared to the lifetime allowance.

Any lump sum benefits you had before 6 April 2006 and any dependant’s pensions you get as a result of the death of your spouse or other relative are not pension rights that need protection.

What do I need to do?

Follow the steps below:

  1. Consider whether your pension rights accrued before 5 April 2006 are likely to need protection.
  2. If you think you need protection read about the different types of benefit protection and what happens if you do not protect your entitlement.
  3. Decide whether you wish to protect your pension/lump sum rights and if you do
  4. Obtain a valuation of your pension/lump sum rights.
  5. Complete the Protection of Existing Rights form and return it to HMRC by 5 April 2009 - see RPSM03202050.

You will need to contact your scheme administrator to obtain the necessary information. You may wish to contact a financial advisor to establish what is best for you. However, it is your responsibility to register for protection. Only you can do it.

Glossary ( RPSM20000000)