

Scheme-specific protection is a form of transitional protection – in other words, protecting pension rights that accrued before a major rule change. In this case, we are concerned with tax-free lump sum rights that arose in a particular scheme before 6 April 2006 (‘A-Day’) that are specific to that scheme. Retirement ages could also be protected in specific schemes. Other forms of transitional protection, by comparison, apply across all the member’s registered pension schemes. Lump sum entitlements protected under enhanced or primary lifetime allowance are treated differently and are out of scope of this article.
Members did not need to apply to HMRC for this protection. It was all documented by the scheme administrators of the schemes concerned.
Following pensions simplification, the maximum pension commencement lump sum (PCLS) a member can take is the lower of 25% of the value being crystallised and 25% of the member’s available lifetime allowance.
For most members of registered pension schemes, the lump sum rules applying now are at least as favourable as the rules that applied before 6 April 2006. However, there are some members whose lump sum rights at A-Day exceeded 25% of their fund value due to the previous calculation methods.
For these members, a degree of protection is given for their lump sum rights as they stood at 5 April 2006.
These lump sum rights will have accrued under occupational schemes or deferred annuity contracts. Tax-free cash of more than 25% wasn’t available in personal pension schemes.
As the rights were held in specific schemes, it was decided that scheme administrators could document the protected amounts themselves based on their A-Day records. There are no certificates for this form of protection.
There are three conditions that must be met for scheme-specific protection to apply:
The maximum PCLS a client with scheme specific protection is entitled to is:
Where:
Having calculated the protected lump sum, you calculate the additional lump sum amount. The two are then added together.
Notes
*This uplift will be 120% until such time as the standard lifetime allowance rises above £1,800,000.
Example
At A-Day, Mr Pike had lump sum rights of £50,000 and a total uncrystallised fund value of £100,000.
Mr Pike makes contributions to the scheme and then takes all his benefits from the scheme on 26 April 2021.
His total fund value is now £220,000.
Mr Pike’s lump sum is calculated as follows:
Mr Pike’s total PCLS is therefore:
£60,000 + £37,115 = £97,115
A member with a scheme-specific protected lump sum may have subsequently applied for one of the types of fixed or individual protection. There is a slight quirk in the calculation for these members.
The A-Day lump sum is calculated in the same manner as outlined above. However, the additional lump sum amount calculation uses the protected lifetime allowance rather than the current standard lifetime allowance. This can result in the member receiving a lower PCLS than they would have done without the additional fixed or individual protection.
Rights that benefit from scheme-specific protection are – as the name suggests – specific to the pension scheme where the rights were accrued and are usually lost on transfer. However, if a ‘block transfer’ (sometimes also known as a ‘buddy transfer’) is made, then the rights can be carried across to the new scheme.
There are three conditions for a transfer to be a block transfer. All three must be satisfied for the protection to be retained.
If any of the conditions are not satisfied, the transfer cannot be a block transfer. It could still be a recognised transfer, so there are no unauthorised payment issues. However, the member would lose their right to the protected benefit entitlement on the funds that were transferred to the new scheme. If any funds remained in the transferring scheme, these would still retain the protection.
There aren’t any restrictions on the type of scheme that can accept a block transfer. However, it’s not possible to do a block transfer from a retirement annuity contract or a deferred annuity contract (Section 32 policy), as these schemes only have one member, so a transfer could never meet the block transfer criteria. If someone has a protected PCLS under a one-member scheme, then the statutory permissive override may be useful to allow them to take the protected amount and still access flexi-access drawdown rather than having to purchase an annuity. See the section below for more information.
If an individual has scheme-specific protection in relation to more than one pension scheme, it is not possible to consolidate these into one scheme and keep all the protected amounts, even if the block transfer conditions are met. The protection is only retained in respect of the first transfer.
When it comes to accessing the pension, the fund must be fully crystallised to use the protection (this is also the case for protected retirement ages); it is not possible to partially crystallise. This includes any other funds that have been transferred in, or contributions made, that didn’t originate from the scheme where the protection was acquired.
However, if someone fully crystallised, they can continue making contributions, or transfer other funds in, and take these at a later date. The crucial point is that they must crystallise everything that is in the pension fund at the time of the benefit crystallisation event.
When pension freedoms were introduced in 2015, there were many changes that needed to be made in a short space of time. To help with this, legislation was put in place that meant any money purchase arrangement could offer the new types of flexible pension payments without having to update their scheme rules. This statutory permissive override can be found in the Finance Act 2004 s273B and allows payments of drawdown pension for members, dependants, nominees and successors, along with other pension freedom payments.
This means any money purchase pension scheme can designate funds to drawdown for the member or, on their death, for their beneficiary, regardless of what is written in their scheme rules. If the original scheme does not have the functionality to physically make the payments of drawdown income, then they only need to pay out the PCLS, make the designation and then make a like-for-like drawdown transfer to a scheme that can facilitate the payments. Once the right to a protected lump sum has been used, the subsequent drawdown-to-drawdown transfer does not need to be a block transfer.
This could help clients with single member contracts containing protected lump sum rights who would otherwise be unable to access income drawdown with their residual funds if the only income option in the scheme rules was an annuity. The original ceding scheme could still choose not to facilitate this, as the member is not able to enforce use of the override.
The receiving drawdown scheme will need confirmation:
In practice, the MPAA will never be triggered if the ceding scheme does not have the ability to pay income, but the ceding scheme needs to include this in its written confirmation to the new scheme.
This article was previously published by FT Adviser.
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