Budget proposals to scrap the lifetime allowance from 2024-25 will not harm Britons who took out enhanced or fixed protection, HM Revenue & Customs has confirmed.
In the 2023 Budget, chancellor Jeremy Hunt said the government would abolish the lifetime allowance (currently at £1.07mn) but cap tax-free cash at £268,275, although those who have previously applied for LTA protection get to keep any higher tax-free cash amount.
According to commentators, the scrapping of the LTA could have come with a "nasty sting in the tail" for people who had been advised to take out fixed protection but who may have been encouraged by Hunt's Budget proposals to return to the workplace and become re-enrolled into a pension.
Rules for those with enhanced or fixed protection outline that protection is lost if contributions are paid in, or benefits accrue – this also applies if they become a member of a new pension arrangement, or make or receive certain types of pension transfer.
It now looks like those with enhanced and fixed protection have got a boost to take advantage of the new tax-free pension rules.Rachel Vahey, AJ BellRachel Vahey, head of policy development at AJ Bell, warned that while the tax-free cash remained capped, the plans by Hunt to get older people back into the workplace could have come with a bit tax penalty hit for those who had applied for enhanced or fixed protection.
She said: "Originally, it seemed those with enhanced or fixed protection risked losing their protection – and therefore their higher tax-free cash – if they broke the protection rules by paying more into their pension.
"This would have effectively stopped them from being able to benefit from the removal of tax limits."
But she welcomed today's clarity from HMRC (March 17), which has confirmed as long as they registered for those protections before 15 March 2023, these people will be allowed to ‘break’ these protection rules and keep their higher tax-free cash protection.
HMRC rules around fixed protection (as at March 15)
| Protection | What it does | Can I keep building up my pensions? |
| Individual protection 2016 | Protects your lifetime allowance to the lower of: — the value of your pension savings at 5 April 2016 —£1.25mn | Yes. But you must pay tax on money taken from your pension savings that exceed your protected lifetime allowance. |
| Fixed protection 2016 | Fixes your lifetime allowance at £1.25mn. | No, except in limited circumstances. If you do, you’ll: |
Source: Gov.UK
Vahey added: “It’s good news to learn that, instead, they will be free to start paying in contributions or transfer pension arrangements without any nasty consequences.
"In addition, they may be able to carry forward their unused annual allowance from the previous three years, meaning they could pay a total contribution of £180,000 next tax year if they have earnings to support it.
“We still need to see the details in the Spring Finance Bill, but it now looks like those with enhanced and fixed protection have got a boost to take advantage of the new tax-free pension rules while still getting to keep their valuable higher tax-free cash entitlement.”
How enhanced and fixed protections work
Enhanced protection:
Enhanced protection was available to anyone with any level of benefits at 5 April 2006. With this protection when the member took benefits, no lifetime allowance charges would arise, regardless of the size of the fund being crystallised.
Pension scheme members had up to 5 April 2009 to register, and those who did received a certificate.
From 2012/13 the PCLS for those with enhanced protection is limited to 25 per cent of maximum of either 25 per cent of £1.5mn, or the standard lifetime allowance, whichever is higher.
Detail has served only to make an already highly complex regime even more so.Nigel Green, deVere GroupIt was also possible to hold enhanced protection with lump sum protection if the individual’s lump sum pension rights were more than £375,000 at 5 April 2006.
The lump sum rights are expressed as a percentage of the certificate. The member is entitled to that percentage of their fund as a PCLS regardless of the size of fund they are crystallising. The percentage can be more or less than 25 per cent.
Vahey said: "Enhanced protection is normally lost if there is ‘relevant benefit accrual’, broadly if the member builds up benefits either in their defined benefit scheme or by contributing to a defined contribution scheme.
"It is also lost if certain types of pension transfers are received or made, or if the member becomes a member of a new pension arrangement (unless it’s a transfer of their existing rights)."
Fixed protection:
There are three forms of fixed protection, each introduced when there was a cut to the standard lifetime allowance. All the fixed protections operate in the same way, but they give different levels of protection.
There was no requirement for a minimum fund size at any particular date, but the protection is lost if there is any benefit accrual or if any contributions are made after the application deadline (or after 5 April 2016 for fixed protection 2016).
There is no separate PCLS protection available with any of the fixed protections. The maximum PCLS available will always be 25 per cent of the protected amount.
HMRC issued certificates to those who have been granted fixed protection 2012 or fixed protection 2014. Applications for fixed protection 2016 were still open – but these may have been closed on 15 March 2023, Vahey warned.
| Level of protection | Max PCLS | Application deadline | |
| Fixed protection 2012 | £1.8mn | £450,000 | 5 April 2012 |
| Fixed protection 2014 | £1.5mn | £375,000 | 5 April 2014 |
| Fixed protection 2016 | £1.25mn | £312,500 | None |
Source: HMRC/AJ Bell
Fixed protection is normally lost if the member either builds up benefits in their defined benefit scheme or contributes to a defined contribution scheme.
It is also lost if certain types of pension transfers are received or made, or if the member becomes a member of a new pension arrangement (unless it’s a transfer of their existing rights).
Complexity remains
However, Nigel Green, chief executive of the deVere Group, agreed that while scrapping the LTA would incentivise people to save for their retirement, "which must be championed", it has created further complexity.
He said: "Detail has served only to make an already highly complex regime even more so, meaning those wishing to take advantage of this new development should seek advice in the first instance.”
He continues: “For instance, the lifetime allowance will be abolished, but this won’t happen in 2023/24.
“Instead, they have abolished the lifetime allowance tax charge which is 55 per cent if you took the excess over LTA as a lump sum, or 25% if you took the excess over LTA as income. This income is taxed as well at your marginal rate.
"They will legislate at a ‘future fiscal event’ to remove the LTA entirely.”
The 25 per cent PCLS is being fixed at £268,275 from April 6. That is 25 per cent of the current LTA of £1,073,100 and what many people still refer to as ‘tax free cash’.
There is no indication this will ever get indexed, according to Green.
He added: "So, over time, especially in high inflation times, this is going to degrade quite rapidly. Any value drawn from a UK pension in excess of the PCLS is typically subject to income tax in the UK."
