I recently worked on a case that covered one of the quirks of legislation surrounding Fixed Protection, and the circumstances under which it can be lost.
To briefly recap on Fixed Protection, there are three types:
- Fixed Protection 2012, which protects the Lifetime Allowance at £1,800,000.
- Fixed Protection 2014, which protects the Lifetime Allowance at £1,500,000.
- Fixed Protection 2016, which protects the Lifetime Allowance at £1,250,000.
Of these, Fixed Protection 2016 is the only one that is still open for applications. The main restrictions on applications are that you cannot have Primary or Enhanced Protection, or an earlier form of Fixed Protection. Unlike in the case of Individual Protection, there is no minimum pension value needed to apply.
There are several ways that Fixed Protection can be lost:
- Making further contributions into a money purchase pension.
- Having further benefit accrual via a defined benefits pension (note that standard revaluation of deferred benefits does not usually cause an issue).
- Breaking transfer restrictions (this is in relation to making sure any transfers are made into a registered pension scheme).
- Starting a new pension other than to accept a transfer of existing pension rights.
This last point is where we come to the issue surrounding pension sharing orders. Receiving a pension credit under a Pension Sharing Order (PSO) does not automatically cause a loss of Fixed Protection, unless you have set up a new pension to receive it.
Essentially, transferring funds awarded under a PSO to a brand new plan causes Fixed Protection to be lost. However, transferring the funds to an existing plan do not.
So for example, the only plan a client may have is a clunky old Personal Pension from the 1990s….in most cases, it may be tempting to source a more flexible and modern plan to receive the PSO, but this could cause a client substantial tax charges further down the line.
In these cases, make use of that clunky old Personal Pension. If at a later time, it is appropriate to review and transfer all of the benefits to something more modern, this will not affect Fixed Protection; it is the first destination of the PSO that matters!