What should savers with lifetime allowance ‘fixed protection’ do?

• Legislation to ratify getting rid of the lifetime allowance is still pending
• ‘Fixed protection’ allowed savers to breach the LTA without attracting charges
• Some new rules remain unclear, and pension sums at stake can be huge

Savers eager to pay into pensions again after the £1.1million lifetime allowance was scrapped are being warned to take precautions – or even hold off for now – if they have ‘fixed protection’.

This is because legislation to get shot of the lifetime allowance is still pending, some of the new rules remain unclear, and the pension sums at stake can be huge, according to pension experts.

The Chancellor announced in the Spring Budget that the total limit on what people could have in their pension pot without facing tax penalties would be ditched from April 6.

People who had applied in the past for ‘fixed protection’ or similar versions of it, a concession that allowed their pensions to breach the lifetime allowance without attracting tax charges, were also permitted to restart contributions.

But the Finance Bill is not expected to reach the final stage of receiving Royal Assent until at least July, or after parliament’s summer recess which would put it back to September or October.

No significant changes are anticipated during this process, but precautionary measures are still being urged on savers.

Confusion over notifications to HMRC

Adeel Patel (whose name has been changed) received an alert from his pension provider Interactive Investor after making two £1,000 contributions to his £800,000 pension in May.

This told him he was responsible for notifying HMRC that his fixed protection no longer applied within 90 days, or he would be liable to penalties of up to £300 for failure to notify then daily penalties of up to £60.

Dr Patel, a 54-year-old GP who lives in Lancashire, had applied for ‘fixed protection’ in 2014.

What is the lifetime allowance and fixed protection? 

The LTA was the total sum people could have in their pension pot without facing tax penalties.

It stood at £1,073,100 when it was ditched by the Government on 6 April 2023. The lifetime allowance included both the money savers and their employers paid into pensions and any growth over the years.

If you have that amount stashed in a pension already it is sensible to pay for financial advice especially regarding ‘fixed protection’ – or individual, primary and enhanced versions of protection – which allowed people to freeze their LTA at older, higher limits.

The 25 per cent tax free lump sum has been capped at £268,275, a quarter of the current LTA limit, unless you have fixed protection in which case the higher figure can apply even if you start paying into your pension again.

Labour has promised to reinstate the lifetime allowance if it wins the next election, which should be borne in mind if this could affect your retirement plans.

> Read a This is Money guide to the annual allowance, currently £60,000, and lifetime allowance legacy rules

> Can I start paying into my pension again after the £1.1m lifetime allowance was scrapped? Steve Webb replies

> What are the rules on fixed protection and tax-free lump sums

That allowed his pension to grow in value to £1.5million, well above the LTA limit which was £1.1million by 2023, without incurring tax penalties – but only on condition he didn’t make any further contributions. 

Pension funds can swell in value even without contributions due to compound growth, as we have previously noted.

Fixed and similar versions of protection – individual, primary and enhanced – were scrapped along with the LTA itself from 6 April, though some special rules still apply, notably regarding tax-free lump sums.

Dr Patel had previously received two emails from II about the changes. These cautioned him that legislation was still pending, and to speak to a financial adviser before contributing to his Self-Invested Personal Pension (Sipp).

However, Dr Patel felt II had issued ‘mixed messaging’ on the changes.

‘It creates confusion and anxiety and undermines trust,’ he told us.

He says regarding his first two emails from II: ‘It’s not financial advice but it’s clear information on the rules. I followed these rules and now they are saying something different.’

II said that as the practical implications of the LTA changes are still being worked through, it felt prudent to continue issuing communications to people in Dr Patel’s circumstances that they are obligated to notify HMRC if they contribute to their Sipp and have certain types of protection.

‘That is because it is not entirely clear from HMRC’s guidance whether there is still a notification requirement,’ it said.

‘We would like to apologise for any confusion caused and can clarify that we do not think Dr Patel’s protection has been invalidated.’ Read II’s full statement below.

HMRC confirmed that those who applied for fixed protection before the Budget date of 15 March will not lose its safeguards if they contribute to a pension scheme from 6 April, and notification rules are waived.

However, fixed protection conditions remain in force for anyone who applied for it on or after 15 March, including the notification rules and penalties.

Wait for LTA changes to become law 

People with fixed protection should ‘hold tight’ and delay making pension contributions until after the pending Finance Bill receives Royal Assent, is the view of Evelyn Partners financial planning director Gary Smith.

He notes that the 25 per cent tax free lump sum has been capped at £268,275 – a quarter of the current LTA limit – unless you have fixed protection in which case the higher figure related to that will apply.

Therefore, it is not worth people risking losing the extra tax free cash they will be entitled to under fixed protection, he says.

There is the potential for the details to be amended and that is why I am recommending my clients, who have fixed protection, to defer making contributions 

Mr Smith thinks it is unlikely HMRC would apply notification penalties in Dr Patel’s case, but reckons if he is still in the cooling off period after his contributions it could be worth trying to get them refunded and making them again later due to the concerns outlined above.

‘Following the Chancellor’s Budget statement in March, the pensions industry is somewhat in flux, as we await for the Finance Bill to go through Parliament and for the legislation to receive Royal Assent,’ says Mr Smith.

‘Until then, there is the potential for the details to be amended and that is why I am recommending my clients, who have fixed protection, to defer making contributions until Royal Assent has been granted.

‘Until the legislation is changed, pension providers still have a responsibility to advise their clients when protections could be lost, and the timescales for notifying HMRC and the potential tax charges that could result.

‘I would encourage those with fixed protection to defer making pension contributions until Royal Assent has been given, and hopefully this will be prior to the summer recess of Parliament in July.’

What does Interactive Investor say? 

In response to the points raised above by Dr Patel (whose name has been changed) about the LTA and his fixed protection, an Interactive Investor spokesperson said:

‘The service communication Dr Patel refers to was issued to customers with a very specific set of circumstances, highlighting that they are obligated to notify HMRC if they contribute to their Sipp and have certain types of protection.

‘As the practical implications of the LTA changes are still being worked through, it felt prudent to continue issuing this communication.

‘That is because it is not entirely clear from HMRC’s Guidance whether there is still a notification requirement. Failure to make a notification previously would cause the penalties referenced by Dr Patel to be levied by HMRC, not Interactive Investor.

‘Following Dr Patel’s feedback, we agree that this communication could be alarming as it does not reference the current guidance and LTA changes.

‘Accordingly, we are in the process of reviewing this particular, very specific service message to establish (a) whether it is still required and (b), if it is, adjusting the terminology to better reflect current guidance and the incoming changes to the LTA.

‘We would like to apologise for any confusion caused and can clarify that we do not think Dr Patel’s Protection has been invalidated.

‘In terms of our broader communications about the budget changes, protections and cessation events; our communications have been consistent, and we have not changed our view of the rules currently in place as communicated to our customers, which is based on current HMRC LTA Guidelines. A great deal of care has gone into this.’