By: 28 August 2019
Money Matters – Many savers are breaching the protection of their pensions savings allowance

Dr Benjamin Holdsworth on why you should check your own position

Thousands of pension savers have unwittingly lost the protection they had put in place to guard against tax charges on their pension savings. HMRC recently revealed that over 12,000 individuals have lost one of the different types of ‘lifetime allowance’ (LTA) protections in the last 12 years.

The LTA limits the amount which can be saved into a pension free-of-tax overall. It currently stands at £1,055,000 but has been as high as £1,800,000 in 2011/12. Each time the government has reduced the allowance, it has launched ‘protection’ schemes that allow savers to preserve their previous LTA as long as certain criteria are met. For most types of protection this means that all contributions to pensions must cease.

The protection schemes savers may already have in place include Enhanced Protection, Primary Protection, Fixed Protection 2012, Fixed Protection 2014 and Individual Protection 2014. The opportunity to apply for all of the above protections has now closed but, with the exception of Individual Protection 2014, all could potentially be lost through continued active membership of a pension scheme.

A further scheme, Individual Protection 2016, is still open for applications for savers who had pension savings in excess of £1 million as at 5 April 2016, which could protect a higher LTA (up to £1.25 million) while allowing ongoing scheme membership. Fixed Protection 2016 is also available for those with no ongoing active pension scheme membership after 5 April 2016.

As this shows the LTA protection rules are nearly as complicated as the pension schemes themselves so it is a very difficult area for the busy professional to get it right. We see many new clients who have previously received incorrect LTA advice. It is important to note that it is the individual taxpayer’s responsibility to inform HMRC that the protection has been lost and there can be penalties for not doing so in a timely manner.

Nearly two-thirds of the lost LTA protection cases recorded were due to the introduction of auto-enrolment. By failing to opt-out of their pension scheme or by being re-enrolled accidentally, some savers will have unknowingly breached the conditions of their ‘Fixed’ LTA protection. Of course, being enrolled (or re-enrolled) into a pension scheme could be a significantly better option than keeping your LTA protection. Each situation should therefore be considered on its own merits with appropriate professional advice.

Dr Benjamin Holdsworth is director of Cavendish Medical – specialist financial planners for medical professionals in the NHS or private practice. For a second opinion on your finances, please contact us on 020 7636 7006. 

The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.  

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.