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Pensions: Fixed Protection

24 November 2011

HMRC has published a newsletter setting out the detail of the new Fixed Protection regime.

Fixed Protection was introduced by the Finance Act 2011 in response to the substantial decrease in the Lifetime Allowance.

Here, we outline some of the elements of the new regime.

What is Fixed Protection?

Essentially, where an individual has been granted Fixed Protection, he will be given an individual lifetime allowance of £1.8m, irrespective of the fact that the general lifetime allowance has now been reduced to £1.5m. 

The application process

Individuals who wish to apply for Fixed Protection must do so before 6 April 2012. Applications must be on form APSS227, which can be found on HMRC’s website. The form must be submitted in hard copy – it cannot be submitted online.

If an individual intends to take benefits from their pension scheme between 6 April 2012 and 31 July 2012, this should be indicated on the application form. HMRC will then ensure it processes the application and issue the relevant certificate before they take their benefits.

HMRC have confirmed that there is no provision for late applications. Individuals must ensure that their application is received by HMRC before the deadline.

Once an application has been processed, HMRC will issue a certificate, the reference number of which should be given by the individual to their scheme administrator. The scheme administrator may also ask for a copy of the certificate.

Loss of Fixed Protection

Where an individual has been granted Fixed Protection and one of the following events happens before they take all their benefits, they will lose that Fixed Protection from the date the event occurred:

In such circumstances, the individual must notify HMRC that they have lost their Fixed Protection.  Failure to do so may result in an initial penalty of up to £300, with an additional £60 per day until the required information is provided.

Following the loss of Fixed Protection, an individual’s benefits will be compared against the prevailing standard lifetime allowance.

What is ‘benefit accrual’?

In a defined contribution (money purchase) scheme, benefit accrual occurs when a tax relievable contribution is paid under the arrangement on or after 6 April 2012 in respect of an individual who has been granted Fixed Protection. 

In a defined benefit (for example, final salary or career average) scheme, whether benefit accrual has occurred is an ongoing test against any increases in the individual’s pension and lump sum rights which occur on or after 6 April 2012.

This means that to have benefit accrual, the pension and lump sum rights of the individual must have increased by an amount which exceeds the ‘relevant percentage’ at any time during a tax year.  

Fixed Protection will then be lost from the point that the relevant percentage was exceeded. It should be noted that this is a different test to the one used for Enhanced Protection. 

In calculating the pension and lump sum rights of an individual, certain assumptions must be made:

Benefit accrual can therefore only occur where the member’s benefits have not come into payment.

Potential problems

RPI v CPI
HMRC said the ‘relevant percentage’ is the rate specified in the scheme rules on 9 December 2010 by which a member’s rights are increased annually. If no such rate is specified, then the annual increase in the Consumer Prices Index (CPI) should be used. 

This could cause problems for members if schemes amend their rules after 9 December 2010. For example, if a scheme’s rules provided at 9 December 2010 for deferred benefits to be increased during the period of deferment in accordance with statute, this would be based on the annual increase in CPI (following the change of basis from the Retail Prices Index (RPI) to CPI implemented by the Government in 2010).
 
If, however, the scheme rules were subsequently amended so that such increases were once again based on RPI, any increase granted by the scheme in accordance with the increase in RPI could result in the individual losing their Fixed Protection if that RPI based increase were greater than the increase in CPI.

Late Retirement Factors
Where a member defers taking their benefits until after their scheme’s normal retirement age, a late retirement factor may be applied to their benefits to compensate them for the fact that, once taken, their benefits will be paid for a shorter period of time. The application of such a factor will result in an increase in the member’s prospective pension rights. 

However, the late retirement factor might, in itself, qualify as a relevant percentage and, if this is the case, there will be no benefit accrual. If it does not qualify as such, then if the increase is greater than the relevant percentage (which will probably be the increase in CPI), benefit accrual will occur and Fixed Protection will be lost. 

Whether or not a late retirement factor will constitute a relevant percentage will depend on the wording of the relevant scheme’s rules. HMRC have, however, indicated that to be a relevant percentage, the annual rate does not have to be specified as an actual percentage in the scheme’s rules so long as:

We would recommend that trustees take professional advice on this matter if it is likely to affect them.

Summary

This article only sets out some of the detail of the Newsletter.

The full text of the newsletter can be found here. If you think that you, or any of your scheme members, might be affected by this please call your usual Shoosmiths contact or one of our pension specialists.

© Shoosmiths. This page is for general information: it is not legal advice. Please read our full terms and conditions for details of the disclaimers and exclusions which apply.

Get in touch

Jacqui Piper

Associate
T: 03700 86 8412
I: +44 (0)1908 48 8412
E: jacqui.piper@shoosmiths.co.uk