What is "Fixed protection"?
The Finance Act 2004 specifies a maximum amount of saving that a person can make in a registered pension scheme without incurring a tax charge. This maximum amount is known as the "lifetime allowance". The lifetime allowance for the tax year 2019/20 is £1,055,000 and it is likely to increase in line with inflation at the end of the current tax year.
The lifetime allowance has been reduced on three occasions. Each time, a version of "fixed protection" has been made available to help people who accrued benefits that already exceeded, or are likely to exceed, the reduced lifetime allowance. The effect of fixed protection is to maintain the individual's lifetime allowance at a certain level to prevent a tax charge being incurred. However, there are various conditions for an individual to keep their fixed protection including that they:
- cannot start a new arrangement under a registered pension scheme other than to accept a transfer of existing pension rights,
- cannot have benefit accrual or make further contributions, and
- will be subject to restrictions on where and how they can transfer benefits.
The individual must tell HMRC if fixed protection is lost or they risk being issued with a penalty.
How does this interact with automatic enrolment?
An individual will normally be automatically enrolled into a pension scheme by their employer in line with the requirements of the Pensions Act 2008. Where an individual has fixed protection, this could result in significant tax charges.
There are however, certain circumstances in which the employer duties in relation to automatic enrolment are changed or do not apply including where the employer has "reasonable grounds to believe" that an individual has fixed protection. The Pensions Regulator states having "reasonable grounds to believe" means that the employer must actually believe that the worker has the protection, and there must be evidence which would lead a reasonable person to believe this. Where this exception applies, the employer can exercise discretion over whether to apply the automatic enrolment duty. It is the employee's responsibility to inform their employer of their fixed protection.
A note of caution from the Pensions Ombudsman
The Pensions Ombudsman has issued a determination in the case of Mr T against Teachers Pensions and the University of Hertfordshire (PO-23961). He decided not to uphold a complaint by a member that his employer didn't properly advise him of the consequences of not opting out of the relevant scheme, and his subsequent loss of tax protection.
The member had previously been granted fixed protection. When he later began a new role as a visiting lecturer at the University of Hertfordshire, he was automatically enrolled into the Teachers' Pension Scheme (the "Scheme"). He had not informed his employer that he held fixed protection. Three years later, his financial adviser informed him that his fixed protection had been invalidated by the additional contributions paid as a result of his membership of the Scheme. Teachers Pensions and the University had refused to refund his contributions and submitted there were no provisions in the Scheme rules that would allow a retrospective opt-out.
The Ombudsman confirmed that there was no requirement under legislation or under the Scheme rules for either Teachers Pensions or the University to provide new members with guidance or advice about lifetime allowance protections. He also pointed out that neither organisation was qualified to provide financial advice. Ultimately, tax is a personal responsibility and the member should reasonably have been aware of the basic provisions of his fixed protection when he applied for it. He should also have queried and ascertained the correct position much sooner that he did.
The Ombudsman highlighted a tax tribunal case (Hymanson v HMRC [2018] UKFTT 667 (TC)) in which the tribunal ruled that an accidental breach of a rule would not necessarily mean that an individual would lose lifetime allowance protection. However, he concluded that it was now for the member to argue his particular circumstances with HMRC.
If you have queries in relation to fixed protection or automatic enrolment or if you'd like to discuss any aspect of this blog, please get in touch with your usual contact at Brodies.
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