Protected pension schemes and the removal of the lifetime allowance

The Issue

On 17 March 2023 HMRC clarified that those with protected schemes could take advantage of the removal of the lifetime allowance (LTA) without forfeiting any of the protection. This means that in certain circumstances individuals who had thought that pension contributions were a thing of the past may wish to revisit the position.

The detailed provisions around protection are complicated and probably too boring for a Tax Bite! However, the main message is that protection worked by stopping individuals from suffering from restrictions on scheme limits etc if they were prepared to undertake not to make any further pension contributions. One way that they could potentially have suffered was by having the amount of tax-free lump sum that they could take restricted. When the abolition of the LTA was announced on 15 March, prima facie it seemed that those with valuable lump sum protection would find it too costly to make further contributions, notwithstanding the fact that they would no longer be affected by LTA charges. HMRC have confirmed that this will not be the case.

Inheritance tax angle

From 6 April 2023 some individuals who had obtained protection from 2006 may be able to contribute up to £180,000 into their pension schemes (and £60,000 for each year thereafter). This will be a valuable piece of inheritance tax (IHT) planning because pension schemes are generally not within the scope of IHT. Therefore (subject to available pensionable earnings) such an individual can achieve an immediate IHT shelter for the contributions. In limited circumstances it may also be worth exceeding the contribution allowance even though this would trigger a tax charge. Here I am thinking of circumstances where an individual is receiving a large salary that he does not require and would rather move into the tax-free environment of a pension scheme and out of his IHT estate.

In a similar vein, a shareholder may be concerned about the existence of ‘excepted assets’ (such as excess cash) building up in a trading company. It should be possible to somewhat mitigate this issue if the company were to make employer pension contributions (and here there do not need to be pensionable earnings).

Forbes Dawson comment

It seems clear that the removal of the LTA will give some members of pension schemes a new lease of life. They will be able to tax-efficiently contribute further funds into schemes without forfeiting any of the advantages of protection and there are also good IHT benefits. However, some caution should be exercised with pension planning of this nature. It would be easy to envisage a scenario whereby the IHT rules on pensions are changed, but unfortunately this kind of risk goes with the territory.




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