Information obtained by consultants LCP from HMRC shows that over 325,000 people have so far taken advantage of special rules which allow them to ‘protect’ themselves against cuts in the lifetime allowance for pension tax relief since it was first introduced in 2006.
However, the FOI also reveals that only around 4,000 people registered for protection in the most recent year. Some people who could benefit may be missing out and could face unnecessary tax bills as a result. This issue is likely to become more important following the announcement in the March 2021 Budget of a five year freeze in the value of the Lifetime Allowance at its current level of £1,073,100.
How do you protect yourself against cuts in the Lifetime Allowance?
Each time the Lifetime Allowance is cut, the government offers people the chance to protect themselves against the cut in recognition that people will have made financial plans on the basis of the higher limit. For example, in from April 2016 the LTA was cut from £1.25m to £1m, which could have caused problems for those who had already built up pots over £1m or who were on course to do so. HMRC therefore offers two forms of ‘protection’:
- “Fixed Protection 2016” – this allows people to lock in the ‘old’ LTA of £1.25m; however, this is on strict condition that no further pension contributions are made; this means that, for example, someone who chose Fixed Protection 2016 but who was subsequently automatically enrolled into a workplace pension and did not opt out would have invalidated their FP 2016.
- “Individual Protection 2016” – for those who already had pensions valued at over £1m when the LTA was cut, IP 2016 allows them to lock in a personalised LTA set at whatever their pensions were worth at the time; so, for example, someone whose pensions were valued for LTA purposes at £1.2m when the change happened in April 2016 could have their own LTA of £1.2m, even though the new ‘headline’ LTA was now £1m; a key feature of IP2016 is that it cannot be lost (apart from exceptional circumstances such as following a divorce), and you can go on saving more into a pension if you wish without losing the protected LTA;
Individual Protection and Fixed Protection were also allowed in 2014 when the LTA was cut from £1.5m to £1.25m, and Fixed Protection was allowed in 2012 when the LTA was cut from £1.8m to £1.5m.
Over 27,500 people have so far opted for IP 2016, whilst over 44,800 have locked in FP 2016. Full figures for all the protections are shown at the end.
