How to Do a Primary Protection Calculation
Last updated on February 23rd, 2021 at 9:16 am
The Pensions legislation isn’t easy, and it makes taking the CII pensions exams all the more challenging. In this article, we take a look at primary protection, introduced to protect those people who had total pension benefits of £1.5m or more on the 5th April 2006 (A day) and who still wanted to make pension contributions. It is very likely to appear in any of the pensions exams so it’s worth spending some time understanding the legislation.
The calculation became a bit more complicated since a quirk in 2012/13, when the LTA decreased to £1.5m, and those with primary protection retained the protected amount based on an underpinned amount of £1.8m.
THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 20/21
An Example from Our Calculation Workbook
Here’s an example from our calculation workbook:
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Maureen had benefits at A-day valuing £1,875,000, giving her a primary protection factor of 0.25. In October 2009, she crystallised benefits worth £900,000; at this time, the lifetime allowance was £1.75m. Maureen now wants to vest the remaining pension benefits, valued at £1,450,000.
Calculate whether Maureen is liable to the lifetime allowance charge.
To answer this we firstly need to establish Maureen’s personal lifetime allowance as at 2009/10: £1.75m (LTA in 2009/10) + (£1.75m x 0.25) = £2,187,500
The value of the benefits taken in 2009 is then calculated against this:
£900,000 ÷ £2,187,500 = 41.1428%, which is rounded down to two decimal places
So, we know that at this crystallisation event, Maureen used 41.14% of her personal lifetime allowance.
At the next crystallisation event, we first need to recalculate her personal lifetime allowance based on the underpinned lifetime allowance of £1.8m:
£1,800,000 + (£1,800,000 x 25%) = £2,250,000
The amount of lifetime allowance used up by the first BCE in 09/10 is calculated using the following formula: £1.5m/standard LTA at the time of previous BCE, so:
£900,000 x £1.5m/£1.75m = £771,428.57
This means that this amount of her personal lifetime allowance has been used in respect of the benefits previously crystallised.
Her personal lifetime allowance is £2,250,000, so her remaining lifetime allowance is £2,250,000 – £771,428.57 = £1,478,571.43. As her remaining benefits are valued at £1,450,000 she has no LTA charge.
Other important facts regarding primary protection are that benefits can continue to be accrued, and it can’t be given up voluntarily; although, it can be lost or revalued through divorce.
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