Understanding the new rules around Lifetime Allowance, fixed protection and individual protection for large pension pots

Category: Financial planning

If you are lucky enough to have a pension pot or a pension plan that works out your savings as being worth more than £1.5 million, then when you take your benefits, it is likely that you will have to pay a lifetime allowance tax charge on the excess.

The existing fixed Lifetime Allowance (LTA) regime was introduced in April 2012 and capped savings at £1.5 million. However from 6th April 2014, the lifetime allowance will be reduced to £1.25 million. A new form of protection called Fixed Protection 2014 is being introduced to protect those who have already built up pension pots of more than £1.25m, but no more than £1.5 million. People with such pension pots will be able to apply for Fixed Protection 2014 from August 2013, but no later than 6th April 2014.

You can’t have Fixed Protection 2014 if you already have primary, enhanced or fixed protection from 2006 or as revised in 2012. You’ll also lose Fixed Protection 2014 if you:

  • have a contribution paid to any of your money purchase pension pots
  • build up new benefits in a defined benefits or cash balance pension pot above a set amount
  • join a new pension scheme – unless you’re only transferring pension savings from one of your existing schemes into the new scheme
  • start saving in a new pension pot either under an existing pension scheme or a new pension scheme.

Several of the above ways to lose your fixed protection may be triggered by being automatically enrolled into a workplace pension scheme, as part of the government’s automatic enrolment exercise, which began in October 2012. HMRC has stated that those who wish to keep their fixed protection must opt out of any new automatic enrolment scheme within one month of having been enrolled.

As well as Fixed Protection 2014, the Government has announced that Individual Protection 2014 will be available when the LTA is reduced to £1.25 million. The details of Individual Protection 2014 are still to be announced but it is expected that:

  • it will give you a lifetime allowance equal to the value of your pension rights on 5 April 2014 – up to an overall maximum of £1.5 million
  • you will not lose Individual Protection 2014 by making further savings into your pension scheme
  • any pension savings in excess of your lifetime allowance will be subject to a lifetime allowance charge

You’ll be able to apply for this from 6 April 2014. You can hold both Fixed Protection 2014 and Individual Protection 2014 but you can’t apply for them at the same time.

If you’re unsure of the value of your pension savings and don’t know whether you need Fixed Protection 2014 or will also need Individual Protection 2014, please do not hesitate to contact us at the office on 020 8543 0111.




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