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Joshua Croft, senior technical consultant at AJ Bell looks at the various LTA protections that have been available and what they mean for PCLS entitlement from the 2023/24 tax year.
With the announcement in the Spring Budget that the Lifetime Allowance (LTA) charge will be removed for the 2023/24 tax year before the LTA itself is abolished the following year, you could be forgiven in thinking this would bring an end to the complex LTA protection regimes. However, the Budget confirmed that although once the LTA is gone tax free cash pension commencement lump sums (PCLS) will be capped at £268,275 (25% of the current LTA), but those who already held one of the existing protections will still be entitled to a higher PCLS.
The Finance Bill also confirmed that anyone who holds a valid LTA protection, where they applied for it before 15 March 2023, can make contributions or start benefit accrual from 6 April 2023 and retain their right to higher PCLS.
Primary Protection and Enhanced Protection
Primary Protection: This type of protection was available to individuals whose total pension benefits were valued at more than the standard lifetime allowance of £1.5 million on 5 April 2006. PCLS entitlement is £375,000 (25% of £1.5m), or if the client was entitled to a tax-free lump sum on 5 April 2006 of more than £375,000, they could preserve that entitlement after 2006 by applying for lump sum protection as part of their primary protection application.
The protected lump sum is confirmed on the protection certificate and is expressed as a monetary amount. When the client comes to take their tax-free cash, the value is uplifted in line with changes to the LTA (underpinned at an LTA of £1.8 million).
Enhanced Protection: Unlike primary protection, there was no fund value requirement for enhanced protection, and clients could apply even if their benefits were worth less than £1.5 million. PCLS entitlement is up to £375,000 (25% of £1.5m), and any contributions made from 6 April 2023 can be included in the calculation.
For clients with pre-2006 lump sum rights of £375,000 or higher, it was possible for them to protect their lump sum entitlement under enhanced protection as well. The protected lump sum is expressed as a percentage of the total value of the pension benefits, rather than as a monetary amount, and can be more or less than 25%. From next tax year, the maximum amount of PCLS these clients are entitled to will be capped at the amount that would have been payable on 5 April 2023.
Fixed and Individual Protection
Fixed Protection 2012 (FP2012): There was no minimum fund value requirement, and clients had to submit paper applications to HMRC by 5 April 2012. The client then received a certificate confirming their protection. PCLS entitlement is £450,000 (25% of £1.8m).
Fixed Protection 2014 (FP2014): Similar in nature to FP 2012, it gave the client a protected LTA of £1.5 million, which meant a maximum PCLS entitlement of £375,000.
Individual Protection 2014 (IP2014): This protection was available to individuals who had pension savings of more than £1.25 million as of 5 April 2014. This protection sets an individual lifetime allowance based on the value of their pension savings as of that date, up to a maximum of £1.5 million with PCLS entitlement being 25% of that protected LTA.
Fixed Protection 2016 (FP2016): This works the same way as previous versions, with the protected LTA of £1.25 million and the maximum PCLS limited to 25% of that amount, £312,500.
Individual Protection 2016 (IP2016): Similar to IP 2014, a client can apply if they had a fund value of £1 million or more as at 5 April 2016. This gives the client a protected LTA based on their pension fund value as at 5 April 2016 and a PCLS entitlement of 25% of the protected LTA.
HMRC have confirmed that if a successful late application is made for enhanced protection or fixed protection on or after 15 March 2023, the client will be entitled to a higher PCLS but will be subject to all existing rules for protection cessation events. This means if they make contributions or start benefit accrual events even after 6 April 2023, they will lose their protection and the entitlement to a higher PCLS.
As the LTA is still in place in 2023/24 there will be no change to the calculation of PCLS for clients who hold Primary Protection, Enhanced Protection without a protected lump sum, or any of the Fixed or Individual Protections.
The Finance Bill didn’t contain new pension legislation to deal with the full removal of the LTA from April 2024, so we await new rules to deal with changing the maximum PCLS from 25% of the LTA to a monetary amount.
