Enhanced Protection – winners and losers

As we enter the new tax year we also enter a new era for pensions. I don’t think anyone outside of Government saw the abolishment of the Lifetime Allowance (LTA) coming. The increases to the remaining pension allowances, coupled with the fact that those with enhanced or any of the fixed protections can re-start contributing and keep protected Pension Commencement Lump Sum (PCLS), were far more generous than the industry could expect.

So, time for celebration?

On the whole, yes, but there are a few hurdles on the way.

First, we can’t quite rip up all those protection certificates just yet. Whilst the LTA is going, it’s not disappearing until 2024/25. There simply wasn’t time between the Budget and the new tax year to remove it – so it’s just the LTA Charge that has been scrapped so far.

Next we turn to maximum PCLS entitlement. Again, this doesn’t change this tax year, but big changes are coming in 2024/25. How exactly it will work when it is a frozen amount of £268,275 as oppose to 25% of the (abolished) LTA, is something we will have to wait and see. In the meantime though we have a promise that those with a higher PCLS entitlement will get to keep it.

This is where it might get interesting for those clients with Enhanced Protection (EP) and protected lump sums. The Spring Finance Bill confirms that this cohort can re-start making contributions from 6 April 2023 and will get to keep their protected lump sum up to the value as at 5 April 2023.

For those that are still earning, making contributions again could be an attractive option. They will have maximum carry forward available, so could pay in up to £180,000 in the new tax year. For personal contributions they would need to have at least that level of earnings – and if they did they would be getting 45% tax relief on a good proportion of that contribution. These are the group likely to have the biggest pension pots, so tending to look at ways of passing funds on rather than spending it all in their own lifetime. With no LTA charge to worry about, passing funds on via a pension with no IHT will be an attractive option even if it doesn’t build up any more PCLS.

The other winners will be those EP holders who have a pension debit applied to their pension on divorce. Whilst the debit has never invalidated the protection, making any contributions to re-build lost funds always has. Now these individuals can boost their pensions again. It also appears that when pension debits are applied post 6 April 2023 they should be able to keep their 5 April 2023 higher maximum PCLS.

The losers though will be EP holders who aren’t in a position to contribute. If, for example, they had a protected lump sum of 30%, this will be capped at 30% of the fund value on 5 April 2023, rather than 30% of the fund value when they come to take it.

So you may have the odd client who doesn’t want to join the LTA abolishment party.