There has been a significant fall in the number of pension savers seeking protection against the Lifetime Allowance according to new HMRC data.
This data — supplied in response to a freedom of information request from pension consultants LCP — shows a total of 325,000 people have taken advantage of these special rules since they were first introduced in 2006.
However only 4,000 people registered for protection in the most recent year. LCP says this suggests people who could benefit are missing out and may 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.
These rules aim to protection pension savers after there has been a reduction in the overall lifetime allowance. Essentially this offers some recognition that people will have made financial plans on the basis of the higher limit.
LCP says that for example, in from April 2016 the LTA was cut from £1.25m to £1m, which will have caused problems for those who had already built up pots over £1m or who were on course to do so.
HMRC 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 anyone 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. This allows them to lock in a personalised LTA set at whatever their pensions were worth at the time. So 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 savers can continue to add more into the pension without losing the protected LTA.
In total HMRC’s figures show over 27,500 people have so far opted for IP 2016, whilst over 44,800 have locked in FP 2016.
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.
Commenting on these figures, LCP partner — and former pensions minister —, Steve Webb said: “Limits on pension tax relief have been cut repeatedly in recent years and savers who planned on the basis of much higher limits can find themselves on course for large tax bills when they start to draw their pensions.
“Anyone whose pensions already exceed the Lifetime Allowance or who thinks that they might to do so in future should check to see if applying to HMRC for protection would be to their benefit”.
LCP says those who could benefit from FP2016 include those who had a sizeable pension pot as at April 2016, but one below the £1m new LTA. Investment growth alone might be expected to take the value of the pot above the £1m mark before the individual took his/her benefits.
To be able to apply for IP2016, the saver would need a pension pot worth between £1m and £1.25m and could lock in their own personal LTA at this level. But under IP they would be allowed to carry on building up pension rights – perhaps through continued service in a DB pension scheme. Although they would still be at risk of an LTA charge if they end up above their personal LTA, the LTA used in the calculation would be the value of their pension wealth as at 2016 rather than the £1m figure that would otherwise apply.