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Court ruling could see LTA fixed protection rules breached unintentionally

20 February 2019

As many as 100,000 savers could face an expected high tax bill following a tiny uplift to their pension, Royal London has warned. 

In a Freedom of Information reply supplied to Royal London, over 100,000 people have secured “Fixed Protection” against past cuts in the Lifetime Allowance for tax relief purposes. When the lifetime allowance was incrementally cut from £1.8 million to £1 million, savers who already had high levels of pension savings were allowed to ‘lock in’ the higher limits through schemes such as ‘Individual Protection’ and ‘Fixed Protection.’

However, Royal London has warned that this protection could become invalid if savers see an increase in their pension rights following a recent Lloyds Bank court case, which ruled that pension funds needed to make changes to eliminate inequalities between men and women in accordance with the rules around Guaranteed Minimum Pensions (GMPs).

For many, this is likely to result in a small change to the amount of pension income they receive. However, even a very modest alteration could invalidate someone’s longstanding protection against past cuts in limits on pension tax relief, according to Royal London. If an individual’s tax relief limit suddenly fell from £1.8 million to the current £1.03 million, they could face a 55% tax charge on the difference, equating to as much as £423,500. Royal London has called for a resolution to be forthcoming, or risk individuals facing large and unexpected tax charges at any point.

In its response to Royal London’s concerns, HMRC said: “While we are considering any potential implications of GMP Equalisation, including on the LTA, it would not be appropriate at this point to confirm whether there is a potential issue.”

Steve Webb, director of policy, Royal London, said: “The issue combines two of the more complex areas of pensions – GMPs and pension tax relief limits. But that combination could result in a catastrophic tax bill for someone who had acted entirely in good faith. It would be absurd and perverse if a small and unrequested pension boost in response to a court judgement meant that a scheme member suddenly faced a huge tax bill.

“It is not good enough for HMRC and DWP to be discussing this issue and thinking about issuing guidance. Taxpayers need to know where they stand as a matter of urgency.”


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