pension schemes and taxation - life assurance and automatic enrolment might be bad for you (52)

by Roderick Ramage, solicitor,

first published in New Law Journal 13 January 2017



This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.


the former tax regime

The Finance Act 1921 introduced tax relief for superannuation funds (pre-funded pension schemes established by employers) in which the assets were held under irrevocable trusts: pension tax law then consisted of the 917 words in s32 of that Act plus regulations to be made under it.  This system continued with modifications for about 85 years and limited tax relief (at the risk of serious over-simplification):

-      in the case of occupational pension schemes, to the amount of benefits that could be provided (2/3rds of final salary, commonly expressed as 40/60ths); and

-      in the case of personal pension schemes, later extended as an option to occupational money purchase schemes, to the amount of the contributions paid by or for the members (on a scale from 17.5% of pay increasing by age bands to 40% over age 60).

Under this regime the amount of tax relief for the highly paid was restricted by an “earnings cap”, which was introduced for 1989/90 at £60,000 and rose to £105,000 for 2005/06.

An infringement of these limits normally resulted in the loss of the scheme’s tax status, which could be retrospective.

the present tax allowances

The tax reforms, introduced by the Finance Act 2004 from 6 April 2006 to coincide with pension law reforms made by the Pensions Act 2004, swept aside the previous regime and replaced it with one tax system applicable to both occupational and personal pension schemes, whether money purchase, defined benefit or hybrid schemes.  Where formerly pension schemes were required to be approved by HMRC, now they must register under the FA 2004 s153: instead of approving a pension scheme’s contribution and benefit design in advance, HMRC waits, so to speak, to see what happens.

A taxpayer has two pension allowances.  The first is the annual allowance (AA), which is the maximum amount that may be paid in any year and on which tax relief is granted.   An individual’s AA is the greater of £3,600 and 100% of his (or her, but I keep to “he” etc for short) UK taxable earnings up to the amounts in table 1.  The second is the lifetime allowance (LTA), which is the value of the member’s pension fund at any benefit crystallisation event (BCE), taking account of any prior crystallisations, also shown in table 1.

In the case of money purchase schemes the annual and lifetime allowances are measured by, respectively, the amount of the contributions and the value of the accumulated fund.

Defined benefit (DB), including final and average salary and other non-money purchase schemes, are more complicated. Broadly speaking the LTA is the amount of the pension at the relevant date multiplied by 20 (FA 2004, s211 and s276), and the AA is the increase over the year in the amount of the LTA (ib s234), but using a factor of 16 instead of 20, adding any lump sum benefit after increasing amount at the start of the year by CPI (ib s235).

The AA and LTA apply to all the taxpayer’s pension schemes of all kinds and not separately to each scheme to which he belongs.

The allowances are not limits.  If the AA is exceeded the member is taxed as though the excess were taxable income (ib s227).  If at any BCE the LTA is exceeded, the excess is taxable as an LTA charge (ib s214) at 55% if it is taken as a lump sum or 25% if taken as pension (ib s215).  If there are different beneficiaries of these benefits, the liability for the LTA charge is to be apportioned equitably (ib s217(4)).

protection against the LTA charge

Table 2 shows all the forms of protection at present in force.  Two forms were introduced on 6 April 2006.  A member with pension funds in excess of £1.5m could notify HMRC that he had primary protection,  under which he was granted a personal LTA equal to his fund’s value at 6 April 2006 increased in line with the standard LTA (FA 2004, sch 36, para 7.  Alternatively a member could notify enhanced protection, as a result of which he would not be liable to any LTA charge, but would lose protection if he accrues any further relevant pension benefit (ib para 12).  In subsequent years fixed protection (the most recent, FA 2016 Sch 4, Part 1) fixes the LTA at the amounts shown in table 2 and will be lost on further benefit accrual and individual protection (ib Part 2) fixes the LTA at the value of his benefits at the relevant 6 April but not above the amounts shown in table 2 and permits further benefit accrual.

In table 2 SLA means the standard LTA, namely to statutory amounts in contrast with the amounts that apply to individuals with protection.


wealth warnings

A simple illustration of the most obvious risk is a well paid employee with a good pension scheme who dies before retirement. The value of his pension fund is exactly £1m, which, since 6 April 2016, has been the amount of a member’s LTA.

Assume for simplicity that none of his pension fund had previously been crystallised and that the whole of it is crystallised by purchasing an annuity for a dependant (event 5D in the table in FA 2004 s216(1).  If there is no other pension benefit, there will be no tax consequences.  But, if the employer is a member of the employer’s registered death in service scheme, which pays a lump sum of 4 x the member’s salary and his annual salary was £100k, the payment of the lump sum of £400k will be another benefit crystallisation event (event 7 in the same table), bringing the total to £1.4m  The tax on the excess of the over the LTA, if taken as a lump sum would be £220,000 and, if as pension, £100,000.

Automatic enrolment under the Pensions Act 2008.  If the taxpayer is enrolled or re-enrolled automatically, protection will not be lost if he opts out in the statutory opt-out period.  From 1 April 2015, employers are not obliged to enrol or re-enrol an employee if they have reasonable grounds to believe that he has enhanced or one for the fixed protections (Pensions Act 2008, s5D inserted by SI 2015/501, art 5).

Automatic enrolment into some other pension scheme.  Protection will be lost unless either the scheme has a rule that treats a member who opts out as never having been a member or the employee cancels the pension arrangement under the FCA cancellation rules.

Death-in-service benefits.  Whether or not the provision of a benefit, will cause protection to be lost depends on the nature of the benefit and the scheme by which it is provided.   For instance, and again oversimplifying, a lump sum equal to a multiple of salary paid by the occupational pension scheme, in which the taxpayer has a right to a deferred pension, should not cause protection to be lost, while an insured benefit of a post 5 April 2006 scheme, to which the employer pays the premiums by contributions to the trustee, will probably cause protection to be lost: see HMRC’s Pensions Tax Manual PTM09210 (enhanced protection) and PMT09350 (2016 fixed protection).

alternatives for highly paid employees

The above notes and the tables below apply only to schemes registered with HMRC under the FA 2004.  Unregistered arrangements might be preferred by employees for whom the allowances affecting registered schemes are too low.

employer-financed retirement benefits schemes  These are the modern equivalents of FURBS and UURBS.  There is no restriction on the amount of the member’s benefits.  No income tax or NICs are incurred by the employee in respect of the employer’s contributions.  The employer receives no corporation tax relief until benefits are paid to the employee.  See Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) Part 7A.

life assurance  Employers may provide relevant and excepted life assurance policies under, respectively, ITEPA 2003 s393B(4)(b) and Income Tax (Trading and Other Income) Act 2005 s480(3).  The former are individual and the latter group policies.  Neither of these affects the employee’s AA or LTA.  Employers normally enjoy corporation tax relief on contributions.

One can ask why employers still establish registered schemes for death in service insurance for any employees.

Table 1 : annual and lifetime allowances

tax year




tax year




































* £40,000










* This is reduced in some circumstances.  Broadly speaking: “tapered” relief reduces the annual allowance to £10,000 for taxpayers’ whose income is £210,000 and over; and, where the taxpayer has started flex-drawdown, it has been reduced to £10,000 and, if the 2016 Autumn budget statement is implemented, will be further reduced to £4,000 from 6 April 2017.


table 2 : protection against the LTA charge

This table was prepared by Ian Greenstreet of Nabarro and is copied here with permission and on condition that neither he nor Nabarro has any responsibility for what anyone does or does not do as a result of reading it.


What is covered


Future accrual


Savings >£1.5m at 5 April 2006.

Notify HMRC by 5 April 2009.



Fully protects rights accrued as at 5 April 2006.

Notify HMRC by 5 April 2009 and no accrual from 6 April 2009.



Fixes LTA at £1.8m (or SLA if higher).

Apply to HMRC by 5 April 2012.  Not needed for those with primary or enhanced protection.


Fixed 2014

Fixes LTA at £1.5m (or SLA if higher).

Apply to HMRC by 5 April 2014.  Not needed for those with primary, enhanced or fixed


Individual 2014

Savings >£1.25m at 5 April 2014.  Fixes LTA as value of pension rights at 5 April 2014 (max £1.5m or SLA if higher).

Apply to HMRC by 5 April 2017.  Not available to those with primary protection.


Fixed 2016

Fixes LTA at £1.25m (or SLA if higher).

Apply online to HMRC from July 2016.  Not available to those with primary, enhanced or fixed protection or FP14.


Individual 2016

Savings >£1m at 5 April 2016.  Fixes LTA as value of pension rights at 5 April 2016 (max £1.25m or SLA if higher).

Apply to HMRC from July 2016.  Not available to those with primary protection or IP14.






copyright Roderick Ramage

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