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10,000 could face lifetime allowance pension lump sum hit

Experts say around 10,000 people who protected their pension pot from high tax charges in 2006 could be better off if they take their benefits before the lifetime allowance is reduced next year.

In his Autumn Statement in December, chancellor George Osborne announced plans to cut the lifetime allowance from £1.5m to £1.25m from 6 April 2014. The annual allowance will also be reduced from £50,000 to £40,000.

The Government is considering introducing two new forms of protection for those who are close to the existing lifetime allowance – fixed protection and ‘personalised’ protection.

If a client takes the new fixed protection they will need to cease contributions by 6 April 2014. If they do this, they will keep the maximum tax-free lump sum of £375,000.

HMRC could also bring in a new personalised protection regime for those with a pension pot worth more than £1.25m on 6 April 2014.

Aviva corporate benefits head of policy John Lawson says around 10,000 people who took out enhanced protection on A Day on 6 April 2006 will need to review their pension before April 2014 in light of the lifetime allowance cut.

This is because the maximum tax-free lump sum they can take will fall from £375,000 to £312,500.

He says: “As the lifetime allowance falls, the amount of tax-free lump sum you can take falls as well. To protect yourself against that, you can take the benefit before it falls or apply for the new fixed protection.

“Advisers should go through their customer base and have a conversation about the impact this will have on their tax-free lump sum. Some people will be better off taking their pension before 6 April 2014 and getting the extra tax-free lump sum.”

Syndaxi Chartered Financial Planners managing director Robert Reid says: “This is another example of why it is so difficult to give people long-term advice.”


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There are 6 comments at the moment, we would love to hear your opinion too.

  1. Sounds like a good move. Let’s face it, the PCLS isn’t going to remain tax-free forever.

    Of course Reid is correct, who’d save into a pensions unless there were some serious inducements?

  2. Matt Worthington 7th February 2013 at 9:48 am

    Yes, those poor folk with over £1.25m in pensions…how will they cope?!

  3. Am I missing something?

    “10,000 people who took out enhanced protection on A Day on 6 April 2006 will need to review their pension before April 2014 in light of the lifetime allowance cut.”

    RPSM03105200 –

    The maximum pension commencement lump sum is 25% of the standard lifetime allowance (£375,000 in 2006/07 when the standard lifetime allowance will be £1.5m) unless an individual has protected lump sum rights.

    A valid claim for enhanced protection coupled with lump sum rights exceeding £375,000 modifies an individual’s authorised lump sum benefits i.e. the amount that they may receive as a pension commencement lump sum at any time after 5 April 2006.

    Now I haven’t exhaustively studied the new proposals but is it not individuals with Primary Protection that should be concerned?

    If this is right I have to move very fast with a number of clients.

  4. Fraser Grant (Advice Lab) 7th February 2013 at 4:04 pm

    Re Thomas Kelly,

    It is members with Enhanced or Primary Protection who do not have lump sum protection that could be disadvanatged.

    Pity about the timing of this article as responses to the draft clauses had to be in by yesterday.

  5. Fraser Grant (Advice Lab) 7th February 2013 at 5:13 pm

    Where did the extra 2,500 enhanced protection certificates come from?

    In an article in MM dated 9th August 2012 HM Revenue and Customs had written to enhanced protection customer of the risks of being included in auto enrolment. Number quoted then was 7,500!

    See link:-

  6. Shouldn’t we wait until the finance bill is drafted. this has been noted already. And pople with primary protection couldn’t opt for fixed protection in 2012.

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