HMRC confirms pension savers can keep their higher protected tax-free cash

• Proposals in the Budget 2023 will abolish the lifetime allowance but cap tax-free cash at £268,275
• Pension savers who have previously registered for lifetime allowance protection are entitled to their higher tax-free cash amount
• Rules for those with enhanced or fixed protection, however, outline that protection is lost if contributions are paid in, or benefits accrue – this also applies if they become a member of a new pension arrangement, or make or receive certain types of pension transfer
• HMRC has confirmed as long as they registered for those protections before 15 March 2023, these people will be allowed to ‘break’ these protection rules and keep their higher tax-free cash protection

Rachel Vahey, head of policy development at AJ Bell, comments:

“The incredible news that the lifetime allowance is to be abolished came with a nasty sting-in-the-tail. Tax-free cash will be capped for pension savers at £268,275, although those who have previously applied for lifetime allowance protection get to keep any higher tax-free cash amount.

“Initially it seemed those with enhanced or fixed protection risked losing their protection – and therefore their higher tax-free cash – if they broke the protection rules by paying more into their pension. This would have effectively stopped them from being able to benefit from the removal of tax limits.

“It’s good news to learn that, instead, they will be free to start paying in contributions or transfer pension arrangements without any nasty consequences. In addition, they may be able to carry forward their unused annual allowance from the previous three years, meaning they could pay a total contribution of £180,000 next tax year if they have earnings to support it.

“We still need to see the details in the Spring Finance Bill, but it now looks like those with enhanced and fixed protection have got a boost to take advantage of the new tax-free pension rules while still getting to keep their valuable higher tax-free cash entitlement.”

How enhanced and fixed protections work

Enhanced protection:

Enhanced protection was available to anyone with any level of benefits at 5 April 2006. With this protection when the member took benefits, no lifetime allowance charges would arise, regardless of the size of the fund being crystallised.

Pension scheme members had up to 5 April 2009 to register, and those who did received a certificate.

From 2012/13 the PCLS for those with enhanced protection is limited to 25% of maximum of either 25% of £1.5 million, or the standard lifetime allowance, whichever is higher.

It was also possible to hold enhanced protection with lump sum protection if the individual’s lump sum pension rights were more than £375,000 at 5 April 2006. The lump sum rights are expressed as a percentage of the certificate. The member is entitled to that percentage of their fund as a PCLS regardless of the size of fund they are crystallising. The percentage can be more or less than 25%.

Enhanced protection is normally lost if there is ‘relevant benefit accrual’, broadly if the member builds up benefits either in their defined benefit scheme or by contributing to a defined contribution scheme. It is also lost if certain types of pension transfers are received or made, or if the member becomes a member of a new pension arrangement (unless it’s a transfer of their existing rights).

Fixed protection:

There are three forms of fixed protection, each introduced when there was a cut to the standard lifetime allowance.

All the fixed protections operate in the same way, but they give different levels of protection. There was no requirement for a minimum fund size at any particular date, but the protection is lost if there is any benefit accrual or if any contributions are made after the application deadline (or after 5 April 2016 for fixed protection 2016).

There is no separate PCLS protection available with any of the fixed protections. The maximum PCLS available will always be 25% of the protected amount.

HMRC issued certificates to those who have been granted fixed protection 2012 or fixed protection 2014. Applications for fixed protection 2016 were still open – but these may have been closed on 15 March 2023.

Fixed protection is normally lost if the member either builds up benefits in their defined benefit scheme or contributes to a defined contribution scheme. It is also lost if certain types of pension transfers are received or made, or if the member becomes a member of a new pension arrangement (unless it’s a transfer of their existing rights).