Fixed Protection and Auto Enrolment

It is important to find out your future employees pension status before they join your company pension or Registered Group Life Scheme as they could be subject to additional tax charges by joining your company pension or group life scheme?

There are several types of protection offered to employees with larger pension values since the advent of A-day in April 2006.  These protections are designed to minimise the impact on employees who have pension savings in excess of limits imposed by the government.

Savings in excess of these government limits are taxed at penal rates through a lifetime allowance charge.  Therefore, it is important for you as a HR individual to understand the impact that joining your company pension scheme or registered group life scheme could have on an employee who has applied for these protections.

• Enhanced Protection
• Primary Protection
• Fixed Protection

On 6 April 2012 the lifetime allowance was reduced to £1.5 million from the £1.8 million it was in 2011-12. As members may have already built up savings of more than £1.5 million or have planned to do so in the expectation that the lifetime allowance would not reduce from the 2011-12 level, a new form of protection called “fixed protection” was set up.

If a member expected their pension savings may be more than £1.5 million (including taking into account past crystallisations) when they come to take their benefits they could use fixed protection to help reduce or mitigate the lifetime allowance charge.

Fixed protection allows individuals to crystallise benefits worth up to £1.8 million without paying the lifetime allowance charge, although the ability to accrue future benefits is limited. The fixed protection should been applied for prior to 6^thApril 2012 and you could not have fixed protection if you had either primary or enhanced protection.

Fixed Protection 2014

Fixed protection 2014 works in a similar way to the existing fixed protection regime introduced in April 2012. From 6 April 2014 the standard lifetime allowance was reduced from £1.5 million to £1.25 million but with fixed protection 2014 the lifetime allowance is fixed at £1.5 million. This means you can take pension savings worth up to £1.5 million without paying the lifetime allowance charge. You had to apply before 6^th April 2014 to get fixed protection 2014.

You could not have fixed protection 2014 if you already had primary, enhanced or fixed protection.

From 5^th April 2012 you could lose the fixed protection or fixed Protection 2014 if you:

·         have a contribution paid to any of your money purchase pension pots

·         build up new benefits in a defined benefits or cash balance pension pot above a set amount - find out more by following the link below

·         join a new pension scheme - unless you're only transferring pension savings from one of your existing schemes into the new scheme including an Auto-enrollment scheme

·         start saving in a new pension pot either under an existing pension scheme or a new pension scheme

Individual Protection 2014

 

As well as fixed protection 2014, the government introduced individual protection 2014, applicable from 6^th April 2014, for those with pension savings on 5 April 2014 valued at over £1.25 million.

Individual protection 2014 will give a protected lifetime allowance equal to the value of the pension rights on 5 April 2014 - up to an overall maximum of £1.5 million. An individual will not lose individual protection 2014 by making further savings in to a pension scheme but any pension savings in excess of the protected lifetime allowance will be subject to a lifetime allowance charge.

An individual will be able to apply for this from August 2014. HMRC must receive the application by 5 April 2017.

An individual can hold both fixed protection 2014 and individual protection 2014 but you can't apply for them at the same time. They can also hold individual protection while holding either enhanced protection or fixed protection but cannot apply for individual protection if you already hold primary protection.

Pensions Act 2008 provisions for automatic pension enrolment while having fixed protection

If an employer is subject to the automatic enrolment duty and automatically enrols an individual into a new pension scheme, they will have one month from the enrolment date to opt out of the new scheme.

If they opt out within that one month period then the law treats them as if they were never a member of the pension scheme.  So if after 6^th April 2014 an employee who has fixed protection who is subject to automatic enrolment and opted out within one month will keep their fixed protection.

If they do not opt out in time then they will lose their fixed protection. An employer will have a duty to automatically enrol those who have opted out every three years, so an individual will need to opt out within one month each time this happens.

If they change employer and the new employer is subject to the automatic enrolment duty, they will be required to automatically enrol the employee into their pension scheme. If the individual has fixed protection they will also need to 'opt out' of the new employer's pension scheme when they are automatically enrolled to avoid losing the fixed protection.

As a registered group life policy is also registered using pension rules, any payment into a Registered Group Life policy on behalf of an individual to cover the cost of premiums will also be treated as a payment for pension purposes and would lose pension protection.  It is important to consider the options available on Group Life Policies to ensure maximum cover of all risks.

 In2Matrix (UK) Limited is an appointed representative of In2Consulting Limited,

 which is authorised and regulated by the Financial Conduct Authority.