One of the biggest talking points from the March 2023 budget was the removal of the Lifetime Allowance.
The Lifetime Allowance had been in place since 2006 and is, in very basic terms, the Lifetime tax free limit on someone’s pension savings. At retirement if the value of the pension benefits exceeded this allowance, then there would be an additional pensions tax charge to pay.
Since it’s inception the Lifetime Allowance has decreased in value at a number of points and the opportunity to apply for a protection was available if certain criteria were met.
Now that the Lifetime Allowance has gone, what is the position with protection?
Existing protections are still useful. Although the LTA has been removed, there remains a limit on the amount of tax-free cash someone could take and this is capped at 25% of the value of their pension benefits or £268,275. However, if there is an existing protection in place, the maximum tax-free cash available is 25% of the protected allowance.
Whilst new applications cannot be made for Enhanced or Fixed Protection after 15th March 2023 (HMRC have confirmed any applications submitted before this date will be processed), individuals can still apply for Individual Protection 2016 as long as their pensions savings were valued over £1 million on 5th April 2016. You can contact your pension scheme and ask them for a valuation of your benefits as at 5th April 2016.
What do we think?
It is sensible to retain a limit on the amount of tax free cash, to avoid members taking all of their benefits as cash and losing a potential regular income. It is disappointing that at the moment it seems the cap of £268,275 (or 25% of the protected LTA) is not linked to any sort of inflation increase and so overtime, if this is not reviewed further, the available tax free cash value will be reducing in real terms.
The removal of the Lifetime Allowance is seeing an increase in those considering working longer as Lifetime Allowance tax isn’t a factor in their decision making, meaning employers like the NHS can retain experienced, skilled staff for longer. Along with the retire and return changes, it has provided more options for those wanting to slow down towards retirement. It is important to make sure your policies reflect all these changes so that your staff know what options are available to them.
More information regarding how to apply for individual protection can be found on the government website
Protect your pension lifetime allowance – GOV.UK (www.gov.uk)