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Primary protection – what it is and how it works

1 February 2019

Primary protection was introduced by Finance Act 2004, for people with total benefits valued at £1.5m (the newly introduced lifetime allowance) or more on 5 April 2006, to reduce potential tax charges. Here the The Prudential technical team look at what it is and how it works.

These articles are for UK financial advisers only.

Key points

  • Primary protection was introduced to protect people with total benefits of £1.5m or more on 5 April 2006.
  • Those with primary protection can continue to accrue benefits after 6 April 2006.
  • Those with primary protection have a personal lifetime allowance which is calculated based on their  lifetime allowance enhancement factor (LAEF).
  • Where benefits exceed the member’s  personal lifetime allowance the excess is subject to an LTA excess tax charge.
  • Primary protection can’t be revoked, and can only be lost (or reduced) in the event of a pension debit.

Why primary protection was introduced

Primary protection was introduced by Finance Act 2004 to protect anyone who would exceed the newly introduced lifetime allowance from the full extent of lifetime allowance excess tax charges. This form of protection was available to anyone whose total benefits (crystallised and uncrystallised) from registered pension schemes on 5 April 2006 were valued as £1.5m or more (the lifetime allowance at 6 April 2006).

Who was primary protection aimed at?

It was aimed at individuals:

  • who wanted to continue in pensionable employment or accrue benefits in a registered pension scheme after 6 April 2006, and
  • were already over the LTA and likely to be so when they took their benefits.

It was also possible to have primary protection over tax-free cash. This is covered in our Tax-free cash and protection article.

Those who had applied for enhanced protection could also apply for primary protection if eligible. Where this applies, the primary protection is dormant and doesn’t apply to the individual unless and until the enhanced protection is lost or revoked. You can read more about this in our Enhanced protection article.

How does primary protection work?

A member covered by primary protection has a personal lifetime allowance (LTA). This is calculated by a lifetime allowance enhancement factor (LAEF), which is added to the standard LTA. As such, the ‘protected’ or registered fund value is automatically indexed in line with the LTA.

The LAEF is calculated as:

(Value of individual’s pension rights at 5 April 2006 – £1.5m) ÷ £1.5m

Example: (£1.7m – £1.5m) ÷ £1.5m = 0.13

Unlike enhanced protection, those with primary protection can suffer an LTA tax charge. This would apply to any benefits that crystallise in excess of the personal lifetime allowance.

With primary protection, the amount of protection increased in line with changes to the standard lifetime allowance.

However, when the LTA decreased to £1.5 million on 6 April 2012, members with primary protection retained the protected amount based on an underpinned LTA of £1.8m.

This is detailed in paragraph 2 (3), Schedule 18 of the Finance Act 2011 , which states the underpinned lifetime allowance is the greater of the current standard lifetime allowance and £1,800,000 (the standard lifetime allowance for the tax year 2011-12).

The personal lifetime allowance then applies upon a benefit crystallisation event (BCE). This is calculated by applying the LAEF to the underpinned lifetime allowance applicable at the BCE date and adding that to the underpinned lifetime allowance.

The formula to calculate the personal lifetime allowance at the BCE date is:

Eg, BCE date: 20/08/2017
Underpinned LTA at BCE date: £1.8m
LAEF: 0.13
Personal lifetime allowance at BCE date: 1.8 + (0.13 x 1.8) = £2,034,000

So this member may crystallise benefits up to £2,034,000 before incurring any lifetime allowance charge.

Unlike enhanced protection, people with primary protection can continue to have contributions paid to their retirement plans and build up more benefits. There is no tax charge on funds below the level of their personal LTA. So, people with primary protection could continue to earn benefits after 5 April 2006, but if they have benefits greater than their personal LTA, the excess is subject to an LTA charge.

Eg, using the member in the example above:
Value of benefits crystallised in 2017/18 tax-year: £2.5m
Lifetime allowance charge due on excess over personal lifetime allowance is £466,000.

If the member did not have primary protection, the lifetime allowance charge would be due on £1,500,000. That is £2.5m less the standard lifetime allowance for tax year 2017/18 of £1m = £1.5m.

This means primary protection reduced the member’s tax charge, but did not eradicate it completely.

Losing primary protection

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