PTM176460 - Lump sum allowance and lump sum and death benefit allowance: Fixed protection: The 'relevant percentage'

If you are looking for information about FP prior to 6 April 2024, please see the National Archives.

Due to the similarities in the principles of these 3 types of protection this guidance covers them all unless otherwise specified and the 3 types of fixed protection are referred to collectively on this page as ‘the fixed protections’.

Individual’s that applied and received a valid fixed protection prior to the 15 March 2023 can accrue benefits and join new arrangements without losing their protection.

For individual’s that applied and received a fixed protection after the 15 March 2023 they can lose their fixed protection, the below guidance only refers to these individuals.

The 'relevant percentage'
The 'relevant statutory increase percentage'
When a scheme's rules specify an annual rate of increase
The 'relevant percentage' and one-off increases
The 'relevant percentage' and capped increases
The ‘relevant percentage’ and scheme rule changes
The ‘relevant percentage’ and late retirement factors
Creation of a new class of membership and late retirement increases
'Relevant percentage' where there has been a transfer of benefits

The 'relevant percentage'

Paragraph 14(13) schedule 18 Finance Act 2011
Paragraph 1(12) schedule 22 Finance Act 2013
Paragraph 4(6) to (8) schedule 4 Finance Act 2016

The ‘relevant percentage’ is:

  • an annual rate used to increase the member’s rights and which was specified in the rules of a pension scheme(or a predecessor registered pension scheme) on 9 December 2010 for FP 2012, 11 December 2012 for FP 2014 or 9 December 2015 for FP 2016 (or the highest percentage so specified for an arrangement where there is more than one arrangement and they have different annual rates) plus the relevant statutory increase percentage
  • for FP 2012 only, an annual rate specified by reference to the retail prices index (RPI) which is used to increase the member’s rights and was specified in the rules of a pension scheme (or a predecessor registered pension scheme) on 6 April 2012 and which does not exceed the RPI increase (or the highest percentage so specified for an arrangement where there is more than one arrangement and they have different annual rates) plus the relevant statutory increase percentage, or if no annual rate was specified the higher of:
  • the relevant statutory percentage increase
  • the percentage by which the consumer prices index (CPI) for the month of September in the previous tax year is higher than it was for the same month in the year before (or nil if there had been no increase or a fall) - however, where the arrangement is under an annuity contract treated as a registered pension scheme under section 153(8) Finance Act 2004 (see PTM031300 or more detail), if applicable, the relevant percentage will instead be an annual rate of increase provided for in the contract so long as this annual rate is limited to the percentage increase in the RPI over a 12-month period specified in the contract and ending in the 12-month period preceding the month in which the increase occurs.

For FP 2012 only, if both the first 2 bullet points apply and give different percentages, the relevant percentage is the higher percentage.

A predecessor registered pension scheme is another registered pension scheme from which some or all of the assets held for the purposes of an arrangement under the scheme directly or indirectly derive. The same principle applies for defining a predecessor arrangement, except that this may be an arrangement in the same as well as another pension scheme.

An increase in the RPI means the percentage by which the RPI for a month specified in the rules of the pension scheme (or predecessor pension scheme) is higher than it was for the same month in the year before (or 0% if it is not higher).

When the relevant percentage is the increase in the CPI, this will be known before the tax years to which it applies for the purpose of the benefit accrual test. For example, for the tax year 2024-25 it is the percentage increase in the CPI for the 12-month period ending September 2023.

If there was no increase or fall in the CPI in the relevant period then the percentage rate would be nil.

The 'relevant statutory increase percentage' 

Paragraph 14(14A) schedule 18 Finance Act 2011
Paragraph 1(14) schedule 22 Finance Act 2013
Paragraph 4(8) schedule 4 Finance Act 2016

This is a percentage increase in a member’s rights under an arrangement which occurs during a tax year solely as a result of the application of certain statutory provisions. The scheme rules do not have to specifically provide for such increases to be given for them to count towards the relevant percentage.

The statutory provisions concerned are:

  • section 15 Pension Schemes Act 1993 or section 11 Pension Schemes (Northern Ireland) Act 1993 - providing for increases to a guaranteed minimum pension because its commencement has been postponed
  • section 16 Pension Schemes Act 1993 or section 12 Pension Schemes (Northern Ireland) Act 1993 - providing for the revaluation of earnings factors for early leavers
  • Chapter 2 Part 4 Pension Schemes Act 1993 or Pension Schemes (Northern Ireland) Act 1993 -providing for the revaluation of accrued benefits for early leavers
  • Chapter 3 Part 4 Pension Schemes Act 1993 or Pension Schemes (Northern Ireland) Act 1993 -providing for the revaluation of accrued benefits for early leavers
  • section 67 Equality Act 2010 - this provision replaces the previous equal treatment provisions in section 62 Pensions Act 1965 and reads into scheme rules a sex equality rule. One effect of the sex equality rule is that it requires men and women to be treated equally in respect of their benefit entitlement for pensionable service from 17 May 1990 onwards.

Note: Late retirement increases under Chapter 1 of Part 4 of the Pension Schemes Act 1993 or the Pension Schemes (Northern Ireland) Act 1993 are not relevant statutory increases. This is because schemes must first provide for late retirement uplifts before the legislation can apply, so the increases do not occur solely as a result of the statutory provisions.

When a scheme's rules specify an annual rate of increase 

The rules of a defined benefits scheme may specify a percentage rate by which the retirement benefits of deferred members will increase each year until the time when the member takes their benefits. The relevant percentage for such a deferred member will be the rate specified in the rules. In contrast, for active members the scheme’s rules will normally provide for benefits to increase each year by reference to additional years of service and increases in pensionable salary rather than at a specified rate. In such cases, the relevant percentage for an active member will be the appropriate increase in the CPI unless there is specific provision in the scheme rules for their benefits to increase by a specified annual rate.

The legislation requires the pension scheme rules to have provided that the value of the individual’s rights under an arrangement shall be increased during the tax year at a specified annual rate. Where the scheme’s rules provide for the rights to increase each year by one of a number of specified rates, for example, by a rate that is the greater/lesser of 5% and the increase in RPI during a 12-month period defined in the rules, then this amounts to a specified annual rate and the relevant percentage is the rate by which the rights are actually increased in any particular tax year. So, there will not be benefit accrual.

However, if the scheme rules give a discretion (to say the scheme trustees or the scheme administrator) as to whether or not pensions should be increased in any particular year or a discretion as to the rate of increase that should apply each year, there is no specified annual rate and the relevant percentage is the CPI percentage calculated as above. If the trustees give an increase in rights in a tax year that exceeds the CPI percentage there is benefit accrual and FP, FP 2014 or FP 2016 is lost.

Where the relevant percentage is fixed by reference to the rate specified in the scheme’s rules at 9 December 2010 for FP 2012, 11 December 2012 for FP 2014 or 9 December 2015 for FP 2016, this may only apply to a particular category of member or different rates may be specified for different categories of members.

A scheme’s rules may specify a percentage rate of increase for deferred members only, so the relevant percentage for an active member is the appropriate increase in the CPI.

A scheme may specify different rates for active members and deferred members. In such cases, as the benefit accrual test is an ongoing test, the relevant percentage for benefit accrual may vary during the year depending on the membership status.

Where an active member becomes a deferred member part way through a tax year the relevant percentage will, until the time of the change in status, be the relevant percentage applying to an active member (the rate stated in the scheme rules at 9 December 2010 for FP 2012, 11 December 2012 for FP 2014 or 9 December 2015 for FP 2016 or CPI for September prior to the tax year in question).

From the date of change to deferred membership status the relevant rate would be that appropriate to a deferred member. It is not permissible to anticipate a more advantageous rate before the change in status occurs. And as the test is by reference to the value of the individual’s rights at the beginning of the tax year, any increase in those rights during the period of active membership will be taken into account when testing for benefit accrual during the period of deferred membership.

Example

Note that for the purposes of this example there is no relevant statutory increase.

Neeta has FP 2014 and is an active member of a defined benefits (final salary) arrangement. At the beginning of tax year 2014-2015, Neeta has accrued a pension of £60,000 per annum. As an active member Neeta’s relevant percentage is CPI. The year-end September CPI rate applying for 2014-2015 is 3%. Neeta opts out of active membership with effect from 1 November 2014. By midnight on 31 October 2014, as a combined result of additional pensionable service and a pay rise, Neeta’s accrued pension is £61,500. So Neeta’s pension has increased by 2.5%. As this is less than the CPI increases of 3% there has not been benefit accrual in the tax year to date. Neeta is now a deferred member of her pension scheme and, under the scheme’s rules, deferred pensions are increased on 31 March each year by the lesser of 5% or the annual increase in the RPI for the year ending in the preceding month of December.

This is now the relevant percentage for testing whether benefit accrual occurs in the remainder of the tax year. Say the annual RPI increase for the year ending in the month of December 2014 is 4%. As this is less than 5%, the relevant percentage for Neeta is now 4%. On 31 March 2015, Neeta gets a pro rata increase in her deferred benefits for the 5-month period of deferment (1 November 2014 to 31 March 2015). Neeta’s pension rights are increased by 1.67% (5/12 of 4%). Neeta’s pension rights have therefore now increased by 4.17% in tax year 2014-15 so there is relevant benefit accrual. Neeta loses her FP 2014 on 31 March 2015.

The 'relevant percentage' and one-off increases 

Some pension schemes do not provide for a deferred member’s benefits to be increased annually. Instead, a one-off increase is applied at the time the member takes their benefits.

A scheme may have a rule which provides, say, that when a member’s deferred benefits are to come into payment, the benefits shall be increased in line with the increase in the Retail Prices Index (RPI) which has occurred during the whole of the period of deferment rather than providing for the benefits to be increased annually in line with the annual increase in the RPI.

HMRC’s view is that the definition of the ‘relevant percentage’ covers such one off increases provided that the rule was in force on at 9 December 2010 for FP 2012, 11 December 2012 for FP 2014 or 9 December 2015 for FP 2016 and that the increase awarded reflects the actual increase in the RPI for the period in question.

The 'relevant percentage' and capped increases 

The rules of a registered pension scheme may provide for increases in the value of deferred pension rights to be ‘capped’, for example, a rule providing that the rate of increase in any year is the lesser of the annual increase in the RPI or 5%.

Where there is such a provision, then an increase in accordance with that provision will be at an annual rate specified in the scheme rules and is the relevant percentage when testing for benefit accrual. So if, for example, the scheme’s rate of increase in a tax year was 4% (that being the relevant annual RPI increase) while the annual increase in the CPI is 3%, the relevant percentage for deferred members of the scheme is 4%.

However, the position is different where scheme rules provide for capped increases as above but go on to provide that the scheme trustees or some other person has discretion to ignore the cap and award a higher rate of increase. In any year in which the trustees exercise their discretion so as to award an increase greater than the cap, the increase for that year is not at an annual rate specified in the scheme rules so the relevant percentage is the appropriate increase in the CPI.

The 'relevant percentage' and scheme rule changes 

The relevant percentage is fixed by reference to the rate of increase specified in the scheme’s rules at 9 December 2010 (or 6 April 2012 for an annual rate specified by reference to the RPI) for FP 2012 or 11 December 2012 for FP 2014 or 9 December 2015 for FP 2016. If the scheme rules are subsequently amended to change the rate of increase the new rate will not be a ‘relevant percentage’.

The 'relevant percentage' and late retirement factors 

Where a member does not take their benefits until an age later than the scheme’s normal age for bringing benefits into payment, the scheme rules may provide that, in addition to normal increases for pensions in payment, the member’s pension rights will be increased to compensate the member for the fact that once taken their benefits will be paid for a shorter period of time.

Such increases are often referred to as ‘late retirement factors’ or a ‘late retirement uplift’.

The application of a late retirement factor will result in an increase in the member’s prospective pension rights; this may result in benefit accrual.

However, if the late retirement factor qualifies as a ‘relevant percentage’ specified in the scheme’s rules on at 9 December 2010 for FP 2012, 11 December 2012 for FP 2014 or 9 December 2015 for FP 2016, there will be no benefit accrual on the occasions where that factor is applied to a member’s pension and/or lump sum rights.

Whether or not a late retirement factor provided under a scheme rule in place at 9 December 2010 for FP 2012, 11 December 2012 for FP 2014 or 9 December 2015 for FP 2016 qualifies as a ‘relevant percentage’ under the tax rules will depend on the facts of the particular case and the wording of the relevant scheme rules.

Where a scheme’s rules provide for specified percentage increases for pension benefits in recognition of the fact that the benefits are not brought into payment until sometime after the scheme’s normal age for doing so, the increases will be by way of a ‘relevant percentage’ so benefit accrual will not occur.

However, the fact that a scheme’s rules do not specify a percentage for such increases in pension benefits does not automatically mean that there is no ‘relevant percentage’. HMRC’s view is that the definition of the ‘relevant percentage’ as ‘an annual rate specified in the rules of the pension scheme’ does not require an actual percentage to be specified in the scheme’s rules so long as:

  • the annual rate (for example, an enhancement factor) can, once calculated, be expressed in percentage terms
  • the scheme trustees do not have a discretion as to whether or not to pay the late retirement uplift at all or as to whether to pay the late retirement uplift in whole or in part (for example, once the rate of uplift has been decided, it must be paid in full).

As the tax rules refer to annual increases during a tax year in relation to a particular individual member, HMRC accepts that the rate of uplift under a scheme’s rules may vary from member to member and/or from year to year.

It is not necessary for the scheme rules to stipulate that the scheme trustees take actuarial advice before deciding on the rate of the late retirement uplift. However, in HMRC’s view the rate of uplift should be a rate that does no more than compensate the member for the fact that their pension is payable for a shorter period of time. In other words, it should not be used to provide what is effectively additional accrual of pension.

Where the scheme rules do require late retirement uplifts to be set by the trustees after taking actuarial advice, HMRC accepts that late retirement uplifts may meet the ‘relevant percentage’ definition and so uplifts paid in accordance with the scheme rules will not lead to benefit accrual and the loss of the fixed protection. For the avoidance of doubt, it is confirmed that the ‘relevant percentage’ definition will be met where a scheme’s rules use one of the following forms of wording (or variations thereon) to express a late retirement uplift as one that is set by the scheme trustees:

“…after obtaining the Actuary’s advice, is reasonable having regard to the period of postponement, but being reasonably satisfied that the value of the pension payable to the member is at least equal to the value required by the Preservation Requirements…”, or

“… increased by the amount calculated on a basis outlined by the appointed actuary as being reasonable having regard to the period of postponement…”, or

“…The Principal Employer and the Trustees hereby undertake that the Plan/Scheme shall be operated in such a manner as to comply with the provisions relating to the preservation of benefits contained in Chapter 1 of Part IV of the pension Schemes Act 1993, and to the extent that the provisions of the Plan/Scheme are inconsistent with this, the provisions of the legislation shall prevail…”.

Creation of a new class of membership and late retirement increases 

To minimise the risk of benefit accrual for members with any of the fixed protections, a scheme’s rules may be amended to create a new class of membership such as a ‘special deferred member class’ or a class of active membership which has curtailed benefit provision. The intention is to have a class of members which no longer accrues benefits under the scheme, which would cause the fixed protection to be lost, but which can continue to be provided with benefits such as life cover for so long as they remain in employment with the scheme employer.

Where a member with fixed protection is put into a new class of membership after 5 April 2012 (FP 2012), 5 April 2014 (FP 2014) or 5 April 2016 (FP 2016) as appropriate then, provided this does not involve the scheme establishing a new arrangement for the member under the scheme, HMRC accepts that the member can continue to be awarded late retirement uplifts if these were specified in the rules of the pension scheme on the appropriate date and meet the ‘relevant percentage’ definition as set out above.

'Relevant percentage' where there has been a transfer of benefits 

Paragraph 14(14) schedule 18 Finance Act 2011
Paragraph 1(13) schedule 22 Finance Act 2013
Paragraph 4(6)(a) and (7) schedule 4 Finance Act 2016

If a member transferred to a new pension scheme, the annual rate of increase specified in their new scheme’s rule at the appropriate date, namely 9 December 2010 (FP 2012), at 11 December (FP 2014) or at 9 December 2015 (FP 2016), may not be as high as that specified in their previous scheme. If the rate for the ‘new’ scheme were to be used when testing for benefit accrual the member would lose their fixed protection, whereas if the annual rate of increase for the transferring scheme had been used, the member would not have lost it. In these circumstances the rate of the increase that was in the previous scheme’s rules at the appropriate date can be used when testing for benefit accrual.

The same will apply where a member has transferred to a new arrangement under their existing pension scheme, where the rate of increase for that (new) arrangement is less than the one that would have applied in their previous arrangement as at the appropriate date.