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Pension lifetime allowance protections – what you need to know

Taken out protection against lifetime allowance cuts? Here’s what the 2023 spring budget pension changes could mean for you.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

The 2023 spring budget brought seismic changes to pensions. The annual allowance was hiked from £40,000 to £60,000 and plans announced to abolish the lifetime allowance (LTA). From 6 April 2023, the LTA charge that applied to funds over £1,073,100 will be removed, with the lifetime allowance set to be removed from legislation from April 2024.

It's a package of measures that will breathe new life into many people's retirement planning.

Lifetime and annual allowance Spring Budget changes – what they mean for you

Lifetime allowance protection and tax-free cash

Some complexities do remain, most notably around tax-free cash. This has been capped at 25% of the current LTA (£268,275). We don't know yet if the government plans to increase this amount in line with inflation, or whether it will stay at its current level long term. Anything over this amount in a pension will be subject to income tax at marginal rate when taken as an income.

How to inflation proof your retirement income

However, those who took out protection against previous cuts in the LTA will be entitled to a higher amount of tax-free cash.

Enhanced protection

  • Members who have enhanced protection with lump sum protection will be able to take a higher level of tax-free cash. However, its value will be limited based on the value of their pension pot on 5 April 2023. For example, let's take someone who holds enhanced protection which they applied for in January 2009, which entitles them to lump sum protection of 40%. At 5 April 2023, they have a pension value of £1.8m which gives them maximum tax free cash of £720,000. By the time the member takes their benefits their pension is valued at £2m. Even though they still have lump sum protection at 40% they can only take the £720,000 in tax free cash.
  • If someone took out enhanced protection with no lump sum protection on 30 January 2009, their maximum pension commencement lump sum will be limited to the lower of £375,000, or 25% of the value of their pension pot at the time of the benefit crystallisation event.

Fixed protection

  • Fixed protection 2012 was taken when the LTA was reduced from £1.8m to £1.5m. People with this protection have a maximum tax-free cash level of £450,000.
  • Fixed protection 2014 was introduced when the LTA was reduced from £1.5m-£1.25m. Maximum tax-free cash is £375,000.
  • Fixed protection 2016 came in when LTA was reduced from £1.25m to £1m. Maximum tax-free cash is £312,500.

Individual protection

  • Individual protection 2016 fixes your allowance at the value of your pensions as of 5 April 2016, up to a maximum of £1.25 million. This means you could take up to £312,500 as tax-free cash if your pension was worth £1.25 million or more on this date. You will only qualify for individual protection 2016 if your pensions were worth more than £1 million in total as of 5 April 2016 and you do not hold primary protection or individual protection 2014.
  • Individual protection 2014 allowance is set at the value that your pension was on 5 April 2014, up to £1.5 million. This means you could take up to £375,000 as tax-free cash if your pension was worth £1.5million or more on this date. With individual protection 2014, any pension contributions made after 6 April 2023 will be included for the purposes of calculating your maximum tax-free cash amount.

Primary protection

  • If you have primary protection but no tax-free cash protection, the maximum amount of tax-free cash you can take is £375,000 (25% of £1.5 million)
  • If you have tax-free cash protection as part of your primary protection, then you'll have a figure printed on your certificate telling you what your maximum tax-free cash amount is. That amount will also be increased by 20%.

Could you lose your protection?

Lots of these protections were given on the condition that no further contributions would be made to a pension. If they were made, the protection would then be lost.

This led to concerns that people who'd previously taken out these protections could be effectively prevented from benefiting from the removal of the LTA to build up further pension. That's because they'd lose their entitlement to increased levels of tax-free cash.

HMRC has since confirmed:

  • Those who took out protection before 15 March 2023 can restart their pension contributions from the new tax year, while retaining their increased tax-free cash allowance.
  • Those who apply for protection after 15 March 2023 will lose their protection (and increased tax-free allowance) if they make a pension contribution in future.
  • This move is welcomed and removes potential barriers that would've continued to get in the way of people's retirement planning.

    These changes come into effect from 6 April. If you breach the current annual or lifetime allowance between now and then, you'll incur a tax charge.

    Breaches of the annual allowance are taxed at the individual's marginal rate. Breaches of the lifetime allowance are taxed at 55% if taken as a lump sum and 25% if retained in a pension.

    Similarly, if you have enhanced or fixed protection and resume contributions before 6 April, you'll lose this protection and entitlement to an increased level of tax-free cash.

    This article isn't personal advice, if you're not sure what's right for your circumstances, ask for financial advice. Tax rules can change, and benefits depend on personal circumstances.

    Pensions and retirement advice

    Get a deeper understanding of how the changes to the lifetime and annual allowances apply to you.

    A financial adviser can help you review your retirement plan and give you the confidence that you're making informed decisions.

    Find out:

    • Whether you could or should increase your pension contributions
    • The effect on any pension protections you may have taken out (once this has been announced)
    • If and how you could mitigate the effects of the money purchase annual allowance or tapered annual allowance
    • If you could save tax in other ways such as capital gains tax

    Book a call with our advisory helpdesk to find out more. They won't provide personal advice, but they'll help you decide if you'd benefit from advice and discuss the charges involved. They'll then put you in touch with an adviser if you decide our service is right for you.

    Book your call

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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