Keeping fixed protection for pension benefits – is this within your control?

Jessica Kerslake

Fixed protection for an individual’s lifetime allowance for tax-favoured pension benefits is a valuable thing.  If you registered for fixed protection before 6 April 2012 you can keep a lifetime allowance of £1.8 million or, if greater, the standard lifetime allowance.  But you lose fixed protection if you go into a new pension arrangement.  You might have thought that telling your employer about your special tax status, and asking them not to put you into a pension scheme would be enough to make sure you kept your fixed protection.  However I am beginning to see cases where employees are being accidentally enrolled despite asking not to be.  Auto-enrolment will only add to the problem.

Generally, in order to retain fixed protection a person cannot have benefit accrual under or start a new arrangement within a registered pension scheme.  There are also restrictions on where and how you can transfer your benefits.  At first glance these conditions seem simple enough.  However, you could lose your fixed protection due to actions outside your control.

An employer admitting a new hire into an existing pension scheme or changing pension provision for existing members (where this is not to comply with a legal obligation or to deal with a transfer) is a case in point.

In many cases an individual with fixed protection will not be enrolled into a new pension arrangement as he couldn’t earn benefits.  However, fixed protection can also be lost if life cover is provided under a registered pension arrangement and, potentially, also as a result of inadvertent administrative errors where an individual is auto-enrolled in the employer’s pension arrangement even though he has confirmed that he does not want to participate.

HMRC’s current guidance on this confirms that fixed protection will be lost at the point the new arrangement is made.  This is the case whether or not there has been benefit accrual (or whether any contributions have been made) under the arrangement.  It is not therefore necessarily the case that a payment must be made in order for a new arrangement to be established, although this will depend on the facts and the rules of the arrangement as to when an individual is a member of the scheme.

HMRC’s guidance further states that an individual who is automatically enrolled into a registered pension scheme where there is no legal obligation to do so who then later cancels the policy under the FSA rules will still be treated as having entered a new arrangement and fixed protection will be lost.

This seems unduly harsh if someone has taken every action within his control to prevent himself from being admitted to the pension scheme.  Are HMRC actually right?  Or can the error be undone and treated as not having happened?  We have raised this with HMRC and we are awaiting their comments.

If you do want to make sure an employee’s fixed protection is not prejudiced, employers have two challenges.

Firstly, you need to monitor HR and pensions administration systems carefully to ensure that an employee with fixed protection, who is likely to be an executive or senior hire, is not automatically enrolled into a new or existing registered pension scheme.  There is an exemption where an individual who has been automatically enrolled opts-out within the statutory opt-out window, but this exemption only applies where there is a strict legal obligation under the statutory auto-enrolment regime for the employer to automatically enrol that individual.

Secondly, an employer should not provide life cover under a registered pension scheme for new hires who have fixed protection.  As an employer, if you do want to offer life cover, you need to consider alternative arrangements, such as excepted group life policies.

Jessica Kerslake is a senior associate at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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