HM Revenue & Customs have introduced ways to help people protect their pension pots from the reductions in the Lifetime Allowance over recent years. What is lesser known is that these protections can become lost when people move employers and join a new tax-registered pension or group life scheme. Although it’s up to the employee to declare any Enhanced or Fixed Protection during the onboarding process, employers would be wise to help facilitate this and provide a correctly structured alternative scheme. Better that than face a disgruntled new recruit.
What is Transitional Relief?
Transitional relief refers to the way in which an individual can hang on to their pension Enhanced or Fixed Protection including circumstances when moving from one employer to another. In order to ensure Enhanced or Fixed Protection continues, individuals should not join a new registered pension scheme or a registered group life scheme.
What is the Lifetime Allowance?
Lifetime Allowance is the total limit on the amount of benefits within an individual’s registered pension schemes and registered group life schemes that receives favourable tax treatment. The Lifetime Allowance was introduced in 2006 at a level of £1,500,000 and, following a series of increases and decreases, stands at £1,030,000 from April 2018. It’s important to bear in mind that lump sum death benefits payable under registered group life schemes also count towards the Lifetime Allowance.
The lowdown on pension Enhanced or Fixed Protection
HM Revenue & Customs introduced a way to help individuals protect their pension pots from reductions in the Lifetime Allowance. These protections have been renamed several times in recent years but remain largely consistent in substance and they include:
- Enhanced Protection 2006 – enhanced protection means individuals are not subject to a Lifetime Allowance tax charge when they draw their benefits. The “price” is broadly that an individual cannot accrue further benefits or join a new registered pension scheme or registered group life scheme.
- Fixed Protection 2012, 2014, 2016 – fixed protection fixes the Lifetime Allowance at the level at which it stood immediately before the relevant Lifetime Allowance was reduced. Again, the “price” is that no further benefits may be accrued and individuals cannot join a new registered pension scheme or registered group life scheme.
Please note, however, that certain other types of Lifetime Allowance Protection (Primary Protection and Individual Protection) do not restrict individuals from accruing further benefits once the election for protection has been made.
How are Enhanced or Fixed Protection lost?
Pension Enhanced or Fixed Protection can become lost on joining a new tax-registered pension or group life scheme. This could, for instance, happen from day one of employment so it needs to be factored in during the recruitment and onboarding process. Enhanced or Fixed Protection can also be lost in other circumstances.
What can be done to keep it?
The prospective employee should declare any tax protection prior to joining a new company. The recruiting employer would need to have an alternative life insurance arrangement in place to ensure that tax protection isn’t lost, such as a non-registered group life insurance scheme otherwise known as Excepted Group Life. The recruiting employer may also wish to offer an alternative to pension (e.g. an appropriately structured cash allowance).
The pros and cons of an Excepted Group Life scheme
Pros
- Benefits accrued by employees will not count towards the Lifetime Allowance and any existing Enhanced or Fixed Protections will not be jeopardised.
- Excepted Group Life schemes can therefore be considered a significant recruitment tool, particularly where senior hires are concerned.
Cons
- Excepted Group Life schemes are more complicated schemes to operate as they are subject to the Inheritance Tax regime (registered group life schemes are not).
- Excepted Group Life schemes must be structured correctly in order to ensure the correct tax treatment.
Key employee considerations
- Do you have any pension Enhanced or Fixed Protection in place?
- If so, you must not join any registered group life scheme. What alternatives does the prospective employer have in place?
Key employer considerations:
- Do you have adequate processes in place to assist a prospective employee who declares that they have Enhanced or Fixed Protection?
- Are any alternative schemes structured correctly for tax purposes?
- Does the new employee understand the long-term implications with regards to Inheritance Tax liabilities?
Employers may consider allowing a new employee to join their Excepted Group Life scheme, even where there is no transitional relief issue, as it could help them to mitigate any potential tax issues with regards to the Lifetime Allowance.
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