Lifetime tax-free pension savings limit removed, but protection still exists
By Edie Bourne
Doctors may no longer face a limit to their overall tax-free pension savings following the Budget, but should check if their tax-free lump sum amount has been safeguarded.
The lifetime allowance tax charge has been removed for 2023-24 and is due to be abolished altogether from April 2024. But the tax-free cash amount – formally called the pension commencement lump sum – will be frozen at £268,275. This represents 25% of the former lifetime allowance of £1.073m.
Any cash taken above this amount will be subject to a tax charge unless individuals have lifetime allowance ‘protection’ in place and can therefore retain their right to take a higher tax-free lump sum.
The last protection scheme to be introduced was ‘Fixed Protection 2016’ which retained the lifetime allowance at £1.25m, for those who met the criteria, when it was reduced to £1m.
In turn, this secured a higher tax-free lump sum. The trade-off was that individuals could not continue with ongoing pension contributions or accrue further benefits above certain limits.
But since 6 April 2023 this is no longer the case as long as individuals registered for fixed protection by 15 March 2023.
Doctors are being advised that another protection scheme called ‘Individual Protection 2016’ is still open to applications and could be useful to gain a higher pension commencement lump sum.
Eligibility for protection
To be eligible, your pensions needed to be valued in excess of £1m on 5 April 2016 and this scheme then secures your lifetime allowance up to £1.25m.
This means your tax-free cash amount will be up to £312,500 – higher than the new limit set by Chancellor Jeremy Hunt in his Budget.
Patrick Convey, technical director with specialist financial planners Cavendish Medical, told Independent Practitioner Today: ‘The rules surrounding protection schemes such as fixed, enhanced and individual protection have always been complicated.
‘The removal of the lifetime allowance tax charge is good news, but doctors may not realise what protection of their lump sum they already have in place – and what security they could still enforce.
‘As ever with finances, it will pay to run some careful analysis of your particular situation. It is very easy to go wrong with tax allowances and protection schemes, which could result in a very expensive mistake.’