Fixed Protection And Life Cover: New Confusion

We have been made aware of an issue which, although technical in nature, could have important and urgent implications for those members of registered pension schemes who have applied, or who are still intending to apply, for "fixed protection". The concern relates to those members who will continue to receive life cover under a registered scheme on or after 6 April 2012. A registered scheme for these purposes may be a pension scheme or an arrangement established specifically to provide death in service benefits.

What is fixed protection?

On 6 April 2012, the lifetime allowance ("LTA") for pension savings under registered schemes reduces from the current level of £1.8 million to £1.5 million. Members who have already built up savings of more than £1.5 million (or who were anticipating doing so, on the basis that the LTA would not reduce) may therefore apply for fixed protection. This allows such members, notwithstanding the reduction in the LTA, to take benefits of up to £1.8 million without paying any lifetime allowance charge, although the quid pro quo is that a member will lose fixed protection on certain events. These include where they have any further "benefit accrual" under a registered scheme.

Is continued life cover "benefit accrual"?

The underlying principle of the fixed protection legislation, and the implication of the published HMRC guidance, is that in a normal case, continued life cover provided from 6 April 2012 under a registered pension scheme should not be regarded as "benefit accrual" for these purposes. In other words, the existence of such life cover will not cause fixed protection to be lost.

The potential problem

However, we have become aware that in recent correspondence HMRC have suggested that this general rule will not apply in circumstances where the death benefit is restricted to the amount paid out by any insurance policy. The consequence of such an interpretation would be that while a death benefit rule simply providing a multiple of pensionable salary would not seem to prejudice fixed protection, a benefit of the same multiple (but subject to a cap of the amount payable by the...