LTA protection deadlines announced

The lifetime allowance will be abolished from April 2024. Announced in the Chancellor’s Spring Budget, this seemingly simple statement is proving complicated to put into practice. In July, 41 pages of draft legislation were published setting out HMRC’s initial attempt at replacing this bedrock of pension legislation with a new regime.

Replacing the lifetime allowance will be two new allowances that lump sums will be tested against: a lump sum allowance of £268,275 and a Lump Sum and Death Benefits Allowance (LSDBA) of £1,073,100. Broadly, lump sums in excess of these allowances will be taxable. Sounds simple, but there are many questions about how these new limits will work in practice, and further draft legislation is still to come.

But one area of certainty has emerged. The draft legislation gives us an end date of 5 April 2025 for applications for fixed protection 2016 and individual protection 2016, nine years after their introduction. As the draft legislation proposes those with lifetime allowance protections will retain their entitlement to higher tax-free cash, and their LSDBA will be increased to reflect their protected lifetime allowance, it’s worth recapping what these protections do and who can benefit from them.

Fixed protection 2016

Fixed protection 2016 locks in the tax-free cash entitlement at £312,500 and lifetime allowance at £1.25 million.

Before 15 March 2023 anyone could apply for this protection provided they didn’t already hold primary protection, enhanced protection or another version of fixed protection, and provided they hadn’t had any ‘protection-cessation events’ since 6 April 2016. Broadly, that meant they couldn’t join a new scheme, make further contributions or have benefit accrual on or after 6 April 2016.

Thanks to legislation passed earlier this year, those who applied for protection by 15 March 2023 are now able to make contributions, have benefit accrual, and join new schemes without losing their protection. If your client applies for fixed protection after 15 March 2023, however, the protection-cessation events still apply. Before making an application, your client should think carefully about whether they want to save more towards their retirement, especially now there is no limit on the income they can take.

Individual Protection 2016

This protection is only available for those who had a fund value of at least £1 million at 5 April 2016. Tax-free cash is 25% of the protected lifetime allowance, which is the fund value at 5 April 2016 capped at £1.25 million. It can be held with enhanced protection or any fixed protection, but not primary protection or individual protection 2014.

Although eligibility is more restricted, your client is free to contribute, have benefit accrual, or join new schemes at any time without losing individual protection. It is only lost if your client is subject to a pension debit that reduces their fund value at 5 April 2016 below the £1 million threshold.

The proposed final deadline for applications is 5 April 2025. Applications are made online via HMRC’s online service. If your clients might benefit from this protection and haven’t applied yet, don’t let the opportunity pass by.