Protecting your clients from the lifetime allowance

With the lifetime allowance (LTA) frozen at £1,073,100 until April 2026, more clients than ever are feeling the squeeze on their pension savings. Thankfully the freeze wasn’t extended further in the recent Autumn Statement, but we’ve still seen an increase in queries at AJ Bell about what LTA protections are available to clients worried about exceeding the current limit.

The good news is that it’s still possible to lock in a higher protected LTA with either fixed protection 2016 (FP16) or individual protection 2016 (IP16). Clients can still apply for both as there is no application deadline. But the protection rules can be complex and there are a few technical points to consider when advising clients on this topic.

Fixed protection 2016

FP16 grants a protected LTA of £1.25 million. It can be applied for as long as your client hasn’t done anything which would have caused them to lose FP16 since 6 April 2016. The protection is effective from 6 April 2016, so if benefits have been taken since then the calculations are revisited.

There are two main ways in which FP16 can be lost. The first is by contributing to a pension, including contributions to defined contribution schemes and benefit accrual in defined benefits schemes. This is something to be particularly mindful of in the world of auto-enrolment.

The second is by joining a new pension scheme other than to accept a ‘permitted transfer’. Permitted transfers generally include transfers to defined contribution schemes from either another defined contribution scheme or a defined benefit scheme. Transfers between defined benefit schemes may not qualify, although some exceptions are outlined in HMRC’s Pensions Tax Manual.

Extra care is needed for clients receiving a pension credit following divorce, as FP16 will be lost unless it is transferred to an existing pension. If a new pension is set up to receive the pension credit, FP16 will be lost.

Individual protection 2016

To apply for IP16, your client must have had pensions with a total value of at least £1 million at 5 April 2016. Like FP16, the protection is effective from 6 April 2016. The level of protection given is based on the 5 April 2016 fund value, up to a maximum of £1.25 million.

This may mean the protection isn’t quite as much as FP16, and fewer people will be eligible due to the valuation requirement. Be aware that if your client’s pension becomes subject to a pension sharing order, the valuation is recalculated which may cause the protection to be reduced or lost.

But unlike FP16, clients can make contributions after 5 April 2016 without losing IP16. This is important for those who continued contributing after that date because they needed a larger pot to meet their retirement goals, or if they received employer contributions which they couldn’t exchange for alternative benefits. Or they simply never thought about protection. Even if your client exceeds their protected LTA, the charge they pay will be lower than if they had no protection.

IP16 cannot be held alongside primary protection, FP12, FP14 or IP14. But it can be held with enhanced protection and, importantly, FP16. Clients eligible for both FP16 and IP16 can apply for both, so that if FP16 is ever lost they still have some protection to rely on.