Lose Enhanced Protection With Lifetime Allowance Scrapped?

Published / Last Updated on 23/03/2023

This may not affect many people but there will be clients and guests alike that watch this video that may be affected if they make the wrong move and lose their enhanced protection for lifetime allowance.

What is the Lifetime Allowance (LTA)?

This was introduced in April 2006 and is a cap of the maximum pension fund (or equivalent pension value) that you can build up throughout your lifetime.  This was originally set at £1,500,000 (it is currently £1,070,100).  If you exceed this amount when you take pension and lump sum benefits, you face a tax charge for exceeding the lifetime allowance.

Enhanced Protection

In 2006, there were many higher earners that had already built-up pension funds of more than £1.5m.  If you were in this position, you were able to register with HMRC for Enhanced Protection for your pension meaning that you would not be penalised for having already built-up over the LTA £1.5m.  There were conditions:

  • You or your employer could no longer pay in any more into a pension for you.  If you did so, you would lose enhanced protection of LTA.
  • You could not accrue any additional form of pension service other than inflation increases in your ‘frozen’ pensions based upon LTA increases.  If you did so, you would lose enhanced protection of LTA.
  • You had to register with HMRC for LTA Enhanced Protection by 5th April 2009.

E.g.  March 2006, pension funds built-up to the equivalent of £2m including 25% tax free lump sum of £500,000.

  • If you failed to register for enhanced protection, you were then capped at the LTA of £1.5m and therefore, 25% tax free cash restriction of £1.5m X 25% = £375,000.  This would mean that when you drawdown all our pension benefits, you would face a tax charge for exceeding the lifetime allowance and of course losing your protected, higher tax-free cash entitlement (in this example) 25% of £2m i.e., £500,000.
  • If you registered for enhanced protection before April 2009, you had enhanced protection up to £2m LTA and a protected higher tax-free cash amount of 25% tax-free lump sum protection, in this example £500,000.
  • If you broke any of the rules on accruing pensions after April 2009, you immediately lose your enhanced protection and revert to normal lifetime allowance, which todays stands at just £1,070,100 (including maximum 25% tax free cash of £268,275)
  • It is therefore valuable to keep Enhanced Protection for Lifetime Allowance.

Why Warn Me Now About Losing Enhanced Protection?

Jeremy Hunt’s Budget on the 15 March 2023 confirmed that the Lifetime Allowance (currently £1,070,100) would be scrapped from 6 April 2023 meaning people, including senior doctors and clinicians, would be free to build up higher pension benefits rather than resigning as there was no point working anymore.

The sting in the tail was in the small print, where it confirmed LTA would be scrapped but a new cap of maximum tax-free lump sums would come into force of 25% of the current LTA £1,070,100 i.e., £268,275 from 6 April 2023.

Therefore, if you still have enhanced protection from 2006 e.g., £2m including £500,000 protected tax-free lump sum, we suggest you do not now think you can start paying into pensions again as the LTA will be scrapped on 5 April 2023.  We are still waiting for the Draft Finance Act 2023 wording and HMRC practice notes on how the removal of the LTA will affect enhanced protection tax free lump sums given the new lump sum cap.

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