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.
Rachel 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.
