This means pension savers will not receive tax-free cash on future growth, according to AJ Bell.
The finance (No. 2) bill, published this week (March 23), sets out key details about how rules announced as part of the chancellor’s Spring Budget will operate in 2023-24.
Chancellor Jeremy Hunt last week (March 15) announced lifetime allowance charges will be abolished from April 6, 2023, and the LTA itself scrapped from April 6, 2024. His spring Budget hit the tax headlines with the changes to the LTA.
Those with enhanced protection and fixed protection registered before 15 March 2023 can from 6 April 2023 pay in new contributions to their pension plans and keep their existing protected tax-free cash entitlement.
This crucial rule freezes the amount they can withdraw tax-free.Rachel Vahey, AJ Bell
But, under the new rules the maximum amount of protected tax-free cash someone with enhanced protection can take will be restricted to the amount they could take on April 5, 2023.
Rachel Vahey, head of policy development at AJ Bell, said it was worth taking a close look at the detail in the bill.
Vahey said: “Those with enhanced protection will be able to take advantage of the new higher annual allowance, allowing them to top-up their pension without fear of a tax hit.
“But if their protection certificate shows a tax-free cash percentage, then this entitlement will be frozen on 5 April 2023.
“In effect, it means that none of the future growth in their pension pot, from both contributions and investment growth, can be withdrawn as tax free cash in the future.
“These changes still allow pension savers to super-charge their pension pots over the next few years. But this crucial rule freezes the amount they can withdraw tax-free, with HMRC preventing those with enhanced protection from completely exploiting the new regime.”
How enhanced and fixed protections work
Enhanced protection:
As previously outlined by FTAdviser, 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.
It 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).
amy.austin@ft.com
