Changes to the sum of money that can be saved into a pension without incurring additional tax have left many people at risk of breaching the lifetime allowance (LTA).
But there are two schemes currently on offer from HM Revenue & Customs that could give some savers a bit of breathing room.
In an updated policy document released on 8 April, HMRC said: “You may be able to protect your pension savings from the 6 April 2016 reduction of the standard lifetime allowance, when it was reduced to £1m ($1.3m, €1.16m).”
Tom Selby, analyst at AJ Bell told International Adviser: “Every time the government has cut the lifetime allowance new forms of protection have been introduced for people who risk being unfairly impacted by the reduction.”
Lowering your allowance
At its peak in 2011/12, the LTA was £1.8m before it was periodically pared back to £1m by 2016/17.
From 2018/19, however, it will rise by the consumer price index (CPI) each year.
The current rate is £1,055,000 – but that is nearly £200,000 below the 2016 limit.
“If your total pension savings are worth more than £1m, or you believe they will grow to more than this, you might want to look at whether you are eligible for one of these forms of protection,” Selby added.
Individual vs fixed
The two protections are:
Who is eligible?
Pension savers can apply for individual protection if their savings were worth more than £1m at 5 April 2016.
Those who already have either primary protection or individual protection 2014, however, are not eligible.
Selby said: “As indicated by the name, individual protection 2016 gives you a personal lifetime allowance set at whatever your pension was worth on 5 April 2016. However, unlike fixed protection 2016, you can continue contributing into your pension.
“This is particularly useful where savers are members of a workplace scheme offering matched employer contributions; as, even with a tax charge, this is likely to represent a decent return on their investment.”
Fixed protection can be applied for if neither the pension saver nor their employer have added to the pot since 5 April 2016 or the person has opted out of any workplace schemes by that date.
Those with enhanced-, primary- and fixed protection, as well as fixed protection 2014, are not eligible.
You can, however, have individual protection 2014, Selby pointed out.
“The biggest danger here is accidentally losing fixed protection through automatic enrolment or re-enrolment – failing to opt-out could result in savers facing a six figure lifetime allowance tax bill,” he said.
Anyone who wants to apply for either protection needs to go through HMRC’s online application process.
“Anyone who is eligible should have their application accepted,” Selby added.
