Although one aim of pensions simplification was to replace ...
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...ing, at least to some extent, rights built up before A-Day.
Enhanced protection was available to everyone with pre A-Day benefits irrespective of the value of their pension rights. An election for enhanced protection fully protected an individual against the lifetime allowance charge regardless of how their...
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...the lifetime allowance, scheme members with enhanced protection have, from 6 April 2023, been permitted to recommence benefit accrual without suffering the loss of their protection. This applies to both defined benefit and defined contribution members.
Only individuals with pension rights valued at more than £1.5m on 5 April 2006 could apply for primary protection. An election for primary protection gave an individual a personal LTA that was larger than the standard LTA and allowed contributions to continue or benefits to continue to build-up after A-Day. This gave increased protection against the LTA charge but the charge still arose if the crystallised value of benefits when they were taken exceeded the personal LTA. For example, money purchase funds that grew at a higher percentage rate between A-Day and taking benefits than the percentage increase in the LTA (taking into account the underpinned lifetime allowance) would be subject to an LTA charge at crystallisation. An LTA charge could also occur for members of defined benefit schemes if benefits were augmented by the scheme.
The primary protection factor
The primary protection factor was the increase to the standard LTA. The factor was calculated as:
(A-Day benefit value - &pou...
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...ant primary protection. The primary protection would only become active if the enhanced protection was lost.
Losing primary protection
An individual cannot voluntarily give up primary protection. The only way that primary protection can be lost is if a pension share on divorce has the effect of reducing the individual’s personal LTA below 100%.
This arises where a pension debit on divorce is awarded against an individual who has primary protection and the amount of the debit is deducted from the value of their benefits at 5 April 2006. If the value then goes below £1.5m (the standard LTA in 2006/07), primary protection is lost. If it does not fall below £1.5m, the factor is recalculated with effect from that date though it does not affect BCEs or RBCEs that may have already taken place between 5 April 2006 and the date of the debit.
Where an individual applied for both enhanced and primary protection, which of them took priority?
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The maximum pension commencement lump sum (tax-free cash) since A-Day is 25% of the value of benefits. At A-Day this equated to a maximum pension commencement lump sum (PCLS) of 25% x £1.5m = £375,000. It then reduced to a minimum of £250,000 (25% of £1m) in 2016/17, before increasing again to £2678,275 by 2023/24. Since 6 April 2024, PCLS payments have been subject to the lump sum allowance.
There were, however, some circumstances in which a lump sum could be protected as more than 25% of the pension value.
Primary protection example
Dennis had a registered PCLS of £500,000 under primary protection. He decided to crystallise his benefits in 2023/24 when the LTA was £1,073,100. The maximum PCLS Dennis could take was £600,000, i.e. £500,000 x (£1.8m/£1.5m). Even though the LTA had reduced to £1,073,100, the £1.8m underpinned LTA is still used in this calculation.
Wh...
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...transfer; or
There was a transfer to an individual pension contract (e.g. a Section 32 buyout contract) or assignment of a member's policy on the wind-up of the scheme
Whilst the lifetime allowance has been abolished, scheme specific tax-free cash entitlements also continue to be of relevance for the purposes of the lump sum allowance.
Some pre A-Day members of occupational pension schemes were entitled to a PCLS equal to their fund value. The whole of their fund can now be taken as a lump sum provided they have had no relevant benefit accrual (see section on enhanced protection) and they didn't have lump sum protection with enhanced or primary protection. The lump sum must be taken in a single transaction.
Which type of pre A-Day pensions could have built up a pension commencement lump sum entitlement of greater than 25% of the value of pension benefits and therefore benefit from scheme specific protection?
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