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Thousands have breached LTA protections, especially since auto-enrolment

22 April 2019

Thousands of pension savers have breached one of the various forms of lifetime allowance protections introduced since ‘A-Day’ in 2006, with a massive spike in numbers since auto-enrolment.

A Freedom of Information request from pensions specialist AJ Bell found over 12,000 investors have notified HMRC of losing their protection, potentially landing themselves with a hefty tax bill.

Since the pension tax simplification regime came into force under Tony Blair’s Labour government in 2006, a new set of transactional protection rules were introduced to help pension members who were close to the lifetime allowance from being penalised.

There are four types of protection; enhanced protection, fixed protection (2012), fixed protection (2014) and fixed protection (2016).

Tom Selby, senior analyst at AJ Bell, said the lifetime allowance was a “pernicious tax”, effectively punishing pension savers for enjoying strong investment performance.

In response to the FOI findings, Selby commented: “Successive cuts to the allowance in recent years have created a complex web of protections designed to protect people close to the lifetime limit from being unfairly penalised. A number of these protections come with terms and conditions – namely that you are no longer allowed to contribute to a pension scheme. If you do, the protection is lost and you could face a huge tax bill on the excess.”

Auto-enrolment spike

The figures showed that around 7,000 protection breaches have been recorded since the introduction of auto-enrolment, with a particular spike since 2017 – coinciding with smaller businesses joining the roll-out.

Selby said it was likely a significant proportion of savers accidentally broke the terms of their protection by failing to opt out of their workplace scheme.

A recent landmark tribunal ruled that a man who had accidentally voided his lifetime allowance fixed protection by failing to cancel a contribution standing order should have his protection reinstated. According to Selby, if HMRC is unable to get the ruling overturned at appeal, it could spell the start of thousands of pension savers who have had their protection certificate revoked also demanding their money back.

Selby said: “Whether it is doctors being hit with tax bills for breaching the annual allowance taper or savers losing fixed protection after contributing to a pension, it’s clear the inherent complexity of the pensions system is causing problems for higher earners.

“The Government should review the pension tax regime and consider simpler alternatives which don’t unnecessarily hamper those doing the right thing and saving for retirement.”

AJ Bell said one option would be to create separate tax regimes, with defined benefit schemes controlled by a lifetime allowance and defined contribution by a single annual allowance. In doing so, the annual allowance taper and money purchase annual allowance could be scrapped altogether, in a move which AJ Bell said would radically simplify the system.


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