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More twists ahead on pensions roller coaster | accountingweb

More twists ahead on pensions roller coaster


Abolishing the lifetime allowance for pension funds is leaving some taxpayers queasy as they contemplate the opportunities and risks of adding to their savings.

18th Apr 2023
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Following the changes to pensions in the March Budget, the maximum amount an individual can take as a non-taxable pension commencement lump sum (aka “tax-free cash”) has been set as 25% of the lifetime allowance (LTA) as it was immediately before the Chancellor stood up. For most people, that means £268,275.

However, the full story is more complicated – with pensions law, isn’t it always? – because some individuals are entitled to protection against the adverse effects of previous changes to the LTA. In keeping with the messy history of pension tax law since 2006, there have been rather too many occasions when individuals have needed to be shielded from changes.

Protections: In the beginning

The story began in 2006 when the LTA was first introduced at a level of £1.5m. Prior to that, it had been possible for members of HMRC-approved pension schemes to: 

  • accumulate a pension pot in excess of the new LTA, and/or
  • have a tax-free cash entitlement in excess of 25% of the pension pot.

The government recognised that to impose a new charge on pension savings that had legitimately grown under a more permissive regime would be open to charges of retrospection, and the new legislation introduced “protections” that could be claimed.

Primary protection: This granted a personalised LTA, based on the extent to which the value of the individual’s pension pot at 5 April 2006 exceeded £1.5m. 

Enhanced protection: This completely exempted individuals who claimed it from the LTA, in exchange for a commitment not to add to their pension pot beyond simple investment growth. 

The deadline for claiming either primary or enhanced protection was 5 April 2009, so individuals to whom this relates will hold certificates issued by HMRC specifying their personal LTA and/or lump sum entitlement.

Protections: Aftershocks

Between 2006 and 2012, the LTA increased progressively to £1.8m, but from 6 April 2012 was slashed back down to £1.5m. Matters only grew more complicated when on 6 April 2014 the standard LTA was reduced to £1.25m. Only two years later, on 6 April 2016, came the third (and final) Treasury assault on the LTA, when it was reduced to £1m. 

To protect individuals who had (in the words of HMRC) “already built up savings… or had planned to do so in the expectation that the lifetime allowance would not reduce”, several new protection regimes were introduced

Type of protection  LTA pot Lump sum maximum   Deadline for application 
Fixed protection 2012 £1.8m £450,000 5 April 2012
Fixed protection 2014 £1.5m  £375,000 5 April 2014
Individual protection 2014 Lower of £1.5m and value at 5 April 2014 25% of protected LTA 5 April 2017
Fixed protection 2016 £1.25m £321,000 No deadline 
Individual Protection 2016  Lower of £1.25m and value at 5 April 2016 25% of protected LTA  No deadline 

Losing protection

There are conditions attached to retaining protection (other than primary protection). Failure to meet these conditions can result in a “protection cessation event”, which resets the tax-free cash entitlement to £268,275. 

Anyone who had applied for protection prior to 15 March 2023 only needs to have adhered to these conditions until 5 April 2023 – nothing done thereafter can damage the protection. 

For applications received by HMRC on or after 15 March, the conditions still need to be upheld.

The following will trigger an event.

  • Making new savings in a pension scheme
  • Becoming enrolled in a new workplace pension scheme (including auto-enrolment)
  • Transferring money between pension schemes in a way that does not meet the transfer rules
  • Benefit accrual at a higher rate than permitted by the legislation.

Pension debits

Receiving a pension debit under a pension sharing order might result in reducing an individual’s pension pot below the trigger level for one of the protections. For example, primary protection can only apply to an uncrystallised pot above £1.5m. If this happens, the protection is lost.

Protecting the protection

Anyone who is currently subject to the protection cessation conditions, which in practice is confined to those claiming FP2016 or IP2016 after Budget Day, can opt out of most workplace pension schemes within a month of enrolment, if they have not already advised their employer that they ought not to be enrolled.

Anecdotal evidence

As reported in the Financial Times, there are signs that high earners are looking to re-join company schemes now that the spectre of lifetime allowance charges has been exorcised, alongside the increase in annual allowance.

Financial advisers welcome the change, since fear of the pension tax charges has driven some clients into potentially riskier alternatives such as venture capital trusts.

However, this is happening in a spirit of caution since the Labour Party has pledged to reverse the abolition of the LTA if elected.

Replies (8)

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By Justin Bryant
19th Apr 2023 09:17

A good article and it's almost amazing how much tax chaos and confusion a Tory government can sow and unlike them Labour were at least queasy about retrospective taxation.

Thanks (1)
Replying to Justin Bryant:
By ireallyshouldknowthisbut
19th Apr 2023 11:57

Its what you get with short term political influence over taxation. Complete chaos.

Whilst tax is 100% political, they had got to be a better way to separate political choices and practical tax collection to ensure more stable rules that run long term, and the main tweaks are rates only. Current system, like much else in the UK is well and truly funked.

Thanks (0)
Replying to Justin Bryant:
By Truthsayer
19th Apr 2023 12:16

If you really think the problem is Tory governments, then you are part of the problem, as you are ripe for being fooled by governments of other persuasions. All democratic governments play this game, as it is forced on them. If they try to do the right thing and keep tax simple, then they will be outflanked by the opposition parties who will complicate tax to buy votes from specific groups by abusing allowances and exceptions.

Thanks (3)
Replying to Truthsayer:
By Justin Bryant
19th Apr 2023 12:59

Yes; you're so right! How foolish of me not to see that I'm part of this tax chaos/confusion problem, notwithstanding that I have absolutely nothing whatsoever to do with it (other than rightly complaining about it). I'm truly grateful for your expert help in correcting my obvious error and oversight there.

Thanks (0)
Replying to Justin Bryant:
By moneymanager
19th Apr 2023 15:38

"and unlike them Labour were at least queasy about retrospective taxation"

which is when Gordon Brown as Chancellor lost the assault on inheritance tax mitigation in what became known as the "Lady Eversden Case", he threw his rattle out of the pram with this Previously Owned Asset Tax

Thanks (1)
By Catherine Newman
19th Apr 2023 12:28

I have a retired surgeon client who was caught up with it and had to pay. It is just a big lottery which seems very unfair.

Thanks (0)
Replying to Catherine Newman:
By AndyC555
19th Apr 2023 15:47

If this was because he was getting a public sector pension, he can be reassured that the 'multiple' being used to value the pension he is getting grossly understates its value.

IIRC the nominal pension pot is valued at 20 x pension + the lump sum.

A colleague of mine who is actuarially inclined worked out that at current annuity rates, the pension really ought to be on a 28 x multiplier. And a couple of years ago when annuity rates were rock bottom, the multiplier was 49 x.

Thanks (4)
By tedbuck
19th Apr 2023 13:15

The crass stupidity of HMG is only exceeded by the even crasser stupidity of the opposition.
Pensions rules decide people to buy pensions or not to do so. After Brown's meddling with the market I went off into property only returning when Brown's lot went - then Osbourne's decision to destroy the btl market sent me back to pensions. Just governments being totally stupid. Pension funds fund the economy so why try to destroy them btls fund the rental market so why destroy them?
Answer is greed by HMG who want more of our money to waste on projects like HS2 and the NHS - the Civil Servants couldn't run a party in a brewery just look at the PFI contracts and HS2's escalating costs you don't need more proof than that but if you do look at education which underperforms at all levels.
And it's getting worse by the day

Thanks (2)