Anytime the UK government decides to slash the Lifetime Allowance (LTA) for pensions, it gives retirees the opportunity to shield their savings from tax liabilities.
This means that, since they are likely to have made financial arrangements with the assumption of a higher threshold, they are able to apply to HM Revenue & Customs (HMRC) for two forms of protection.
One is the Fixed Protection 2016, which allows people to ‘lock in’ the old LTA of £1.25m ($1.72m, €1.45m). The second one is Individual Protection 2016, which applies to those whose pension has already been valued at £1m and are able to lock in a ‘personalised’ LTA set at whatever their pensions were worth at the time.
Applications
According to a freedom of information (FOI) from HMRC by advisory firm LCP, more than 325,000 people have so far taken advantage of these special rules since they were introduced in 2006.
But the FOI showed that just 4,000 applied to the taxman for protection in the current year.
LCP said the issue is likely to become more prominent following the five-year freeze in the value of the LTA at £1.07m announced in the March 2021 budget.
This also means that, if people do not apply for protection, they could face unnecessary tax bills.
Steve Webb, partner at LCP, said: “Limits on pension tax relief have been cut repeatedly in recent years and savers who planned on the basis of much higher limits can find themselves on course for large tax bills when they start to draw their pensions.
“Anyone whose pensions already exceed the LTA or who thinks that they might to do so in future should check to see if applying to HMRC for protection would be to their benefit”.
