Pension Protection and the Lifetime Allowance

In March 2023, significant changes were announced regarding the pensions lifetime allowance (LTA), including the removal of the tax charge for 2023/24 and planned removal of the allowance for 2024/25. This creates new opportunities for those who have been locked in their lifetime allowance, and also emphasises the importance of pension protection strategies.

Pension protection allows individuals with a sizeable pension to avoid a tax charge by giving you a higher lifetime allowance. This then helps to not only safeguard your pension savings, but also optimise retirement planning and navigate the tax consequences which includes a tax-free cash entitlement. However, now that plans are in place to remove the LTA, what does that mean for pension protection?

Firstly, it is important to understand the options when it comes to pension protection. There are currently two types of protection you can apply for; Fixed and Individual Protection.

Fixed Protection was offered for the tax years 2012, 2014 and 2016 where individuals could benefit from a higher level of LTA, £1.8 million, £1.5 million, and £1.35 million respectively, but with the catch that no further contributions could be made. For example, if someone had a pension worth £1.3million and elected for fixed protection 2014 they could not make further payments after 5th April 2014 as long as the current LTA rules are in place.

Individual protection was again offered during the tax years 2012, 2014 and 2016 and were to provide a personalised LTA at the value of your pension plan on the 5th of April in that tax year. For instance, if your pension was worth £1.1 million on 5th April 2016, you could apply for Individual Protection 2016 and secure a £1.1 million LTA.

The tax-free cash entitlement for each type of protection is calculated based on the protected pension pot value, but any amounts exceeding the protected value will not be eligible for tax-free cash.

Despite the changes announced and the fact there is no LTA charge or potentially no LTA at all, the tax-free cash entitlement remains as a benefit, as this will be higher than people who do not have these protections due to the maximum amount of tax-free cash being frozen at £268,275 from 6th April 2024.

The other point to keep in mind is that a new Government could potentially change the LTA again, therefore you still have that higher allowance and do not have to use it if, for example, a new LTA came in that was higher than the protection offers you. Essentially, it gives you options for your pension.

It is still possible to apply for Fixed and/ or Individual Protection 2016 and, under certain limited circumstances, late applications for other protections (Enhanced, Primary, Fixed Protection 2012 & 2014 or Individual Protection 2014) can be made. The only difference is that you do not have the same benefit of further pension contributions as those who applied before 15th March 2023.

Due to the specific implications, and suitability of each option based on individual circumstances, it is important to speak to a professional before making any decisions.

If you would like to discuss your pension protection options following these announcements, please contact one of our Independent Financial Advisers on 0117 450 1300 who would be more than happy to assist you.