Guide Fixed Protection 2016

The standard lifetime allowance (SLA) reduced from £1.25m to £1m on 6 April 2016. Two fund protection options were introduced on the same date to offer some transitional protection for people who think they will be affected by this SLA reduction. These are fixed protection 2016 (FP2016) and individual protection 2016 (IP2016). This article looks at the FP2016 option. IP2016 is covered in a separate section of this guide.

FP2016 fixed an individual’s lifetime allowance at £1.25m. From 6 April 2024 when the lifetime allowance is replaced by new allowances, namely the lump sum allowance (LSA) and the lump sum and death benefit allowance (LSDBA) an individual with FP2016 will see their LSA and LSDBA increased in line with their protected amount.

Changes to what causes FP2016 to be lost were made in the Spring Budget on 15 March 2023, but these only affect individuals who already held FP2016 on that date. We cover the changes in this guide.

Anyone making an application for FP2016 must have ceased all benefit accrual before 6 April 2016 to be eligible to apply.

Any member of a registered pension scheme, who doesn’t already have primary protection, enhanced protection, fixed protection 2012 or fixed protection 2014 can apply for FP2016. There is no requirement to have a certain amount of pension savings. However, all benefit accrual must have ceased by 6 April 2016 to be eligible to apply. The deadline for applications is 5 April 2025.

There are a couple of scenarios where FP2016 could be held in conjunction with another form of fund protection. These are:

• it’s possible for someone to hold FP2016 and have IP2016 as a back-up. The FP2016 will take precedence and IP2016 will only apply if the FP2016 is lost. It would only be possible to have FP2016 with IP2016 as a back-up where the value of pension savings at 5 April 2016 was more than £1m. 
• it’s possible for someone to hold IP2014 and have FP2016 as a back-up. The IP2014 will take precedence and FP2016 will only apply if the IP2014 is lost. Realistically, IP2014 can only be lost if a pension sharing order is made on divorce and the pension debit reduces the value of the member’s benefits below £1.25m. In addition, FP2016 could only be valid providing there has been no ‘benefit accrual’ after 5 April 2016. 

For those who held FP2016 between 6 April 2016 and 15 March 2023, the protection would have been lost if any of the following situations occured before 6 April 2023:

• a new arrangement for an individual is set up under a registered pension scheme other than to accept a transfer of their existing benefits.
• any transfer is made out of an individual’s existing arrangement(s) that is not a ‘permitted transfer’. Typical examples of permitted transfers are transfers from one money purchase arrangement to another or transfers from a defined benefit arrangement to a money purchase arrangement, provided the transfer payment received by the money purchase arrangement is actuarially equivalent to the pension rights being transferred. The receiving scheme can be a UK registered pension scheme or a qualifying recognised overseas pension scheme (QROPS). For clarity, a permitted transfer between arrangements can be within the same scheme provided the benefits remain in the same form e.g. defined contribution. So, if an individual has Fixed Protection or Enhanced Protection. an intra-scheme transfer of funds to a new arrangement within the same scheme (for example to invest in different funds) won't lose them their protection.
• there is ‘benefit accrual’. For a money purchase arrangement, such as a personal pension, benefit accrual occurs if any personal, third-party or employer contributions are made after 5 April 2016. For a defined benefit arrangement, benefit accrual would occur where there is any yearly accrual of benefits that exceeds the ‘relevant percentage’.

None of these situations will cause the loss of FP2016 from 6 April 2023, so long as the protection was held on 15 March 2023.

However, anyone applying for FP2016 between 16 March 2023 and 5 April 2025 will be subject to these conditions and may lose the protection if any of the above situations occur.

If FP2016 is lost, it’s the individual’s responsibility to notify HMRC. They must do so within 90 days of the day in which they first could be reasonably expected to have known they had lost the protection.

Once FP2016 is lost, unless IP2016 is held as back-up, all subsequent relevant benefit crystallisation events (RBCEs) for the member are tested by reference to the LSA and the LSDBA. BCEs and/or RBCEs that happened before the protection is lost, are not affected and don’t have to be recalculated.  

If an employer has an auto-enrolment or auto re-enrolment duty for a new or existing worker, and that worker holds a lifetime allowance protection, such as FP2016, the employer doesn’t have to auto-enrol or auto re-enrol them. They can choose not to apply the auto-enrolment or re-enrolment duty to that worker, even though the rules regarding loss of protection have changed from 6 April 2023 for those who held fixed protection on 15 March 2023.

The employer needs to have reasonable grounds for believing that the worker has FP2016 and there must be evidence to back up this belief. The employer may require the worker to provide their protection reference number from HMRC as evidence of their FP2016 status.

If the employer isn’t aware that the worker has FP2016, or just decides to go ahead and auto-enrol the worker anyway, so long as the worker opts out within the opt-out period of one month, they will be treated as never having joined the scheme, and the FP2016 will not be lost.

If a worker joins their employer’s pension scheme under contractual enrolment (where there is no opt-out), the worker will lose FP2016 unless they cancel the arrangement within the 30 day cooling-off period. Alternatively, the worker could inform the employer of their FP2016 before the contractual joining process starts, to make sure no new arrangement is established for them.

Clearly, there is no need to exclude an employee from auto-enrolment or auto re-enrolment if they're not going to lose their protection by accruing benefits, however, the auto-enrolment rules haven't changed, therefore employers could still use this option even if their employee was in possesion of a relevant protection certificate on 15 March 2023.

The deduction of a pension debit from an individual’s pension arrangement will not result in the loss of FP2016 so the remaining benefits will continue to be protected. If an individual decides to make further pension savings to build up their funds again after the debit then FP2016 may be lost. This depends on whether the individual held the protection on 15 March 2023 and when the benefit accrual takes place:

• protection certificate held on 15 March 2023 and benefit accrual took place before 6 April 2023 - protection lost.
• protection certificate held on 15 March 2023 and the first benefit accrual took place on or after 6 April 2023 - protection is not lost.
• FP2016 applied for on or after 16 March 2023 and the first benefit accrual takes place on or after 6 April 2023 - protection is lost. 

If there had been any benefit accrual between 6 April 2016 and the date of application, the individual would not be eligible to apply for FP2016.

An ex-spouse or ex-civil partner who applies for FP2016 after 15 March 2023 who receives a pension credit transfer could lose their fund protection if the transfer is made to a new pension arrangement in their name as this would not be classed as a permitted transfer. If a transfer is made to an existing pension arrangement in the ex-spouses or ex-civil partner’s name, then:

• if the transfer is to a money purchase arrangement, FP2016 would not be lost. 
• if the transfer is to a defined benefit arrangement, FP2016 may be lost but this would only be determined when the ‘benefit accrual’ for the tax year the transfer is made is calculated for the receiving arrangement. 

These rules do not apply if the ex-spouse or ex-civil partner held their protection certificate on 15 March 2023.

When an individual takes their pension benefits with FP2016, the relevant lump sum* will reduce the individual's lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA).

However, because they have FP2016 their LSA and LSDBA will be increased as follows:

• LSA = £312,500 instead of the basic £268,275
• LSDBA = £1.25m instead of the basic £1.0731m

to reflect the protection held by the individual.

Earlier fixed protection regimes have a similar effect on the LSA and LSDBA:

FP2012

• LSA is increased to £450,000
• LSDBA is increased to £1.8m

FP2014

• LSA increased to £375,000
• LSDBA increased to £1.5m

If no tax-free cash protection applies, the maximum tax-free cash available will be the lower of: 

• the individual's remaining LSA,
• the individual's remaining LSDBA and
• 25% of their remaining fund. 

* relevant lump sum means:

For LSA:

• pension commencement lump sums
• the tax-free element of any uncrystallised fund pension lump sums, and
  
• stand-alone lump sums.

For LSDBA:

• all of the above, plus
• any serious ill-health lump sums, plus
• all lump sum death benefit payments, except charity lump sum death benefit payments and trivial commutation lump sum death benefits.

FP2016 takes effect from:

• 6 April 2016, or
• the date that FP2016 becomes active if it was held as a back-up to IP2014 and the IP2014 is lost. 

To expand on the second bullet point, FP2016 takes effect from 6 April 2016 irrespective of the date that it’s actually applied for. As a result, there could be situations where a benefit crystallisation event (BCE) (pre 6 April 2024) or relevant BCE (RBCE) from 6 April 2024 has taken place on or after 6 April 2016 and before FP2016 has been applied for. See ‘Taking benefits before applying for FP2016?’ for more information.

Applications for FP2016 can be made online.

Anyone wanting to use the online service will need to have an HMRC Online Services Account and further information on signing in or creating an account is available in the above link. 

A protection reference number will be provided by HMRC (no paper certificate will be issued) and this number will need to be given to a pension scheme by an individual each time benefits are being taken where FP2016 is held. Reference numbers will be in the format of FP16 followed by ten digits and one letter (eg, FP161234567890A).

The closing date for applications for FP2016 is 5 April 2025, however it would make sense for individuals to apply to HMRC for FP2016 before they take their pension benefits so that the value of any relevant benefit crystallisation event can be applied to the increased LSA and LSDBA.

Anyone wishing to apply for FP2016 has to have stopped contributions or stopped accruing benefits with effect from 6 April 2016. In fact, none of the events detailed under 'Losing FP2016' may have occurred since 6 April 2016, in order to apply for FP2016.

A protection reference number for FP2016 will not be issued by HMRC if it is being applied for as a back-up to IP2014. HMRC will instead inform someone if their application for FP2016 as a back-up has been successful. An FP2016 protection reference number will only subsequently be issued if the other form of fund protection is lost and the FP2016 becomes active.

An online scheme administrator look-up service is available on HMRC’s website here. This allows scheme administrators to check the validity of a protection reference number supplied by a customer or scheme member.

The deadline for applications for FP2016 is 5 April 2025 but it would be preferable for fund protection to be in place before any benefits are taken. Irrespective of the date that FP2016 is applied for, the protection is effective from 6 April 2016 (unless FP2016 is being held as a back-up to another form of fund protection, in which case it becomes effective when the other protection is lost or given up). 

Before 6 April 2024, there may have been situations where a benefit crystallisation event (BCE) took place on or after 6 April 2016 but before FP2016 has been applied for. Where this BCE was tested against the standard lifetime allowance rather than the £1.25m lifetime allowance under FP2016, it's possible to subsequently re-visit the BCE to recalculate the figures based on a £1.25m lifetime allowance.  It's not clear from the legislation and supporting guidance whether this will affect RBCEs and the LSA and LSDBA from 6 April 2024.

This, however, may cause an issue where a member has taken protected tax-free cash (PTFC) post 5 April 2016 and then subsequently applies for FP2016, as the PTFC may have been overpaid. This will result in the overpayment becoming an unauthorised payment and therefore subject to a tax charge. 

Example:

Jill applied for FP2016 fixing her SLA at £1.25m. One of her pension schemes has PTFC of £80,000 and a fund of £120,000 on 5 April 2006. 

On taking pension benefits in March 2017 from this fund, when the SLA is £1m, its value had increased to £160,000.

Jill’s tax-free cash in March 2017 is originally calculated as:

(PTFC on 5/4/06 x £1.8m / SLA in 2006/07) +

(25% x (current value – (fund on 5/4/06 x current SLA / SLA in 2006/07)))

(£80,000 x £1.8m/£1.5m) + (25% x (£160,000-(£120,000x1/1.5)))

= £96,000 + (25% x (160,000-£80,000))

= £96,000 + £20,000

= £116,000

She then applies for FP2016 in May 2018 and the ordinary tax-free cash protection is recalculated as: 

(PTFC on 5/4/06 x (£1.8m / SLA in 2006/07)

PLUS

(25% x (current value - (fund on 5/4/06 x (greater of £1.25m or the current SLA) / SLA in 2006/07)))

(£80,000 x £1.8m/£1.5m) + (25% x (£160,000 – (£120,000 x £1.25m/£1.5m)))

= £96,000 + (25% x (£160,000 - £100,000))

= £96,000 + £15,000

= £111,000

Jill has received £5,000 tax-free cash more than she should have. This £5,000 will be an unauthorised payment.

Further information on fixed protection can be found in HMRC guidance at: