Pension protection guidelines from HMRC
Posted on: June 19th 2023 · read
Further to the recent Spring Budget announced by Jeremy Hunt back in March, there have been many questions surrounding the changes to pension legislation, in particular, how the changes to the lifetime allowance may affect those with Individual Protection.
Thankfully, HMRC has issued new guidance providing further clarification on how these changes may affect you.
“I have enhanced protection since the lifetime allowance has been abolished, does this affect my lump sum protection?”
According to the guidance published by HMRC, provided that you hold valid enhanced protection with lump sump protection, you can retain the lump sum protection that is noted on your protection certificate. You are therefore entitled to a tax-free lump sum at the value of the protected percentage of your pension pots on 5th April 2023.
By way of example, should you hold enhanced protection with lump sum protection of 45% and the value of your pensions on the 5th April 2023 is £1,550,000, you are entitled to a tax-free lump sum of up to £697,500.
Should you make any contributions after 5th April 2023, these will not be included in the calculation for your tax-free lump sum.
If you hold valid enhanced protection, but with no lump sum protection, you are entitled a maximum tax-free lump sum of £375,000.
Provided that your successful application was received by HMRC prior to the 15th March 2023, then you are able to continue contributing into your pension without losing your enhanced protection. Should your application have been received by HMRC on or after 15th March, then certain criteria must be met for the protection to remain valid.
“I have primary protection, does this affect my lump sum protection?”
Provided that you hold valid primary protection with lump sum protection, you will continue to be protected at the value of the lump sum protection stated on your certificate.
Should you have a pension debit applied as a result of a pension sharing order, and this results in the value of your pension decreasing below £1.5 million, your increased tax-free lump sum will revert to 25% of the standard lifetime allowance.
“I have fixed protection, does this affect my lump sum protection?”
If you hold valid:
- Fixed protection, you are entitled to a tax-free lump sum of up to £450,000
- Fixed protection 2014, you are entitled to a tax-free lump sum of up to £375,000
- Fixed protection 2016, you are entitled to a tax-free lump sum of up to £312,500
If your successful application was received by HMRC before 15th March 2023, then from 6 April 2023, you can continue to contribute to your pension schemes without losing your fixed protection.
If your successful application was received by HMRC on or after 15th March 2023, you’ll still need to meet certain conditions for the protection to be valid.
“I have individual protection, does this affect my lump sum protection?”
In the event that you have valid individual protection 2014, your lifetime allowance would have been protected at either the lesser of two figures: the cumulative value of all your pension pots as of 5th April 2014, or £1,500,000. As a result of this, you’re eligible to receive a tax-free lump sum equivalent to 25% of your secured lifetime allowance.
To illustrate, if your individual protection 2014 stands at £1,400,000, your increased tax-free lump sum would amount to £350,000. It’s important to note that any contributions made to your pension schemes after the 6th April 2014 are not factored into the computation of the tax-free lump sum to which you are entitled.
On the other hand, if you possess valid individual protection 2016, the lifetime allowance you applied to be safeguarded is either the total value of all your pension pots on the 5th April 2016 or £1,250,000, whichever is lesser. You’re entitled to a tax-free lump sum amounting to 25% of your protected lifetime allowance, or 25% of the standard lifetime allowance, depending on which is greater.
If a pension debit is applied from a pension sharing order, causing the value of your pension pot to fall below the minimum value necessary for protection, your increased tax-free lump sum will default to 25% of the standard lifetime allowance.
The above information is based on our current understanding of the HMRC tax and legislative position, which is subject to change. These are generic scenarios which may be overly simplified and may not apply to your specific circumstances.
This article should not be construed as a personalised recommendation and no action should be taken without further formal advice.
The rules surrounding pension protection are complex and any course of action will depend on your specific objectives and circumstances. For a detailed review of your arrangements, please contact our Financial Planning department.