The information in this article is based on our understanding of the Finance Act 2024, secondary legislation and guidance issued by HM Revenue and Customs. We expect further regulations and guidance from HMRC in the coming weeks. The secondary legislation and latest guidance is still being analysed so the content within this article is subject to change.
From 6 April 2024, the lifetime allowance (LTA) is being scrapped and three new pension allowances will be introduced: the lump sum allowance (LSA), the lump sum and death benefit allowance (LSDBA) and the overseas transfer allowance (OTA). In this article we look at how the LSA and LSDBA will be impacted for individuals with lifetime allowance protections and enhancements.
How will LTA protections and enhancements interact with the LSA and LSDBA?
Various forms of lifetime allowance protection have been made available over the years to offer some transitional protection for individuals when the LTA was first introduced, and when it was later reduced. The protections offered those who had built up (or may build up) pension funds in excess of the lifetime allowance a boost in their LTA.
If a transitional protection is in place, the standard lifetime allowance doesn’t apply, and the individual will have a higher lifetime allowance that’s based on their own circumstances and the type of protection they applied for.
From 6 April 2024, the existing lifetime allowance protections will increase an individual’s lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA) rather than their LTA.
The protections are referred to in legislation as ‘Enhancement of Allowances’ but will retain their existing names. Broadly speaking, the existing conditions for each lifetime allowance protection will remain.
Primary protection
When the LTA was introduced on 6 April 2006, individuals who had pension benefits that exceeded £1.5 million on the previous day could register their own personal LTA. Individuals in these circumstances were given a primary protection enhancement factor which was used to calculate their personal LTA.
Following the abolition of the LTA, those with primary protection will have:
- an LSA of £375,000
- an LSDBA of £1.8m multiplied by their primary protection factor (plus any other enhancement factor that applied to them).
Individuals who, on 5 April 2006, were entitled to lump sum rights of more than £375,000 could protect that right if they held primary protection. From 6 April 2024, that protection continues in a slightly amended form, but the effect of the protection remains the same. Further details will be added as we get more information.
Enhanced protection
Enhanced Protection (EP) was introduced to protect individuals whose benefits were likely to exceed the LTA. Anyone could apply for enhanced protection, irrespective of the value of their pension savings on 6 April 2006. Individuals who applied for enhanced protection had to stop paying into any money purchase scheme prior to 6 April 2006, and members of defined benefit schemes could only build up limited benefits after 6 April 2006. If an individual held EP on 15 March 2023, the restriction on paying contributions or accruing benefits has been removed from 6 April 2023. EP would not be lost if contributions are paid, or benefits are accrued on or after 6 April 2023.
Following the abolition of the LTA, those with enhanced protection, but no separate lump sum protection, will have:
- an LSA of £375,000
- LSDBA will be the value of their uncrystallised rights on 5 April 2024
HMRC’s Pension Tax Manual has been updated to cover this – click on the button to open the PTM page.
Individuals who, on 5 April 2006, were entitled to lump sum rights of more than £375,000 could protect that right if they held enhanced protection. The permitted maximum for a PCLS for someone with lump sum rights in excess of £375,000 and enhanced protection is the lower of:
- The maximum percentage of PCLS allowed on 5 April 2006 applied to the value of benefits being used to provide PCLS and income (minus a deduction in respect of any drawdown funds being used to purchase an annuity), and
- their remaining LSA (amended to the maximum that could have been paid on 5 April 2023 less any PCLS payments made since 5 April 2023).
Fixed protection
The LTA was reduced on three occasions after 6 April 2006, and each time it reduced, a version of fixed protection was introduced for individuals who had pension values which exceeded, or were likely to exceed, the new, lower LTA. Prior to 5 April 2023, fixed protection gave individuals protection from the LTA charge and could give a higher tax-free cash entitlement. While there is no longer an LTA charge, fixed protection can still be used to secure a higher LSA and LSDBA.
- FP2012 was set at £1.8m
- FP2014 was set at £1.5m
- FP2016 was set at £1.25m
However, prior to 6 April 2023, the following actions would cause the loss of fixed protection:
- making pension contributions to a money purchase scheme or accruing benefits under a defined benefits scheme,
- starting a new arrangement other than to accept a transfer from an existing plan,
- where any transfer is made that is not a permitted transfer – you can find out more about this in our guide to Fixed Protection 2016.
These restrictions ceased to apply from 6 April 2023 for those who had registered for fixed protection by 15 March 2023. However, they will continue to apply to those who apply for fixed protection after 15 March 2023 (remember – to be able to apply for FP2016, benefit accrual had to cease by 6 April 2016). Applications for FP2016 must be made to HMRC before 6 April 2025.
Following the abolition of the LTA, individuals with fixed protection will have the following LSA and LSDBA:
FP2012: LSA = £450.000. LSDBA = £1,800,000
FP2014: LSA = £375,000. LSDBA = £1.500,000
FP2016: LSA = £312,500. LSDBA = £1,250,000
Individual Protection
Two different individual protections were introduced to provide protection against the reductions in LTA in 2014 and 2016.
Individual protection 2014 gave a personal LTA of between £1.25m and £1.5m. Members applying for individual protection 2014 must have had at least £1.25m of total pension benefits as at 5 April 2014 and could not already have primary protection.
Individual protection 2016 gave a personal LTA of between £1m and £1.25m. Members applying for individual protection 2016 must have had at least £1m in total pension benefits on 5 April 2016. The deadline for applications for individual protection 2016 is 5 April 2025.
Individuals holding one of the forms of individual protection will have their LSA and LSDBA adjusted to reflect their protected amount.
For individuals holding Individual Protection 2014 their LSA will be the lower of:
- 25% of their protected amount, and
- £375,000.
Their LSDBA will be the lower of:
- their protected amount, and
- £1,500,000.
For individuals with Individual Protection 2016 their LSA will be the lower of:
- 25% of the protected amount, and
- £312,500.
Their LSDBA will be the lower of:
- their protected amount, and
- £1,250,000.