What should savers with lifetime allowance ‘fixed protection’ do?

Savers eager to get back into pension payments after the £1.1 million lifetime benefit was scrapped are being warned to take precautions – or even wait for now – if they have ‘fixed protection’.

This is because legislation to get rid of the lifetime benefit is still pending, some new rules remain unclear and the pension amounts at stake could be huge, pension experts say.

The chancellor announced in the spring budget that the overall limit on what people could have in their pension pot without facing tax penalties would be lifted from April 6.

People who had applied for “fixed protection” or similar versions of it in the past, an allowance that allowed their pension to break through lifelong benefit without taxation, were also allowed to start contributing again.

But the Finance Bill is not expected to reach the final stage of royal assent until July or after parliament’s summer recess, which would delay it until September or October.

No significant changes are expected during this process, but savers are still urged to take precautions.

Confusion over reports to HMRC

Adeel Patel (whose name has been changed) received a warning from his pension provider Interactive Investor after making two £1,000 contributions to his £800,000 pension in May.

This told him he was responsible for reporting to HMRC that his standing protection no longer applied within 90 days or he would face fines of up to £300 for not reporting the daily fines of up to £60.

Dr. Patel, a 54-year-old general practitioner living in Lancashire, had applied for ‘fixed protection’ in 2014.

This allowed his pension to grow in value to £1.5 million, well above the LTA limit of £1.1 million in 2023, without incurring tax penalties – but only on the condition that he made no further contributions.

Pension funds can also increase in value without premiums through compound growth, as we noted earlier.

Fixed and comparable versions of protection – individual, primary and extended – were dropped from April 6 along with the LTA itself, although some special rules still apply, particularly regarding tax-free lump sums.

Dr. Patel had previously received two emails from II about the changes. These warned him that the legislation was still pending, and that he should speak to a financial adviser before contributing to his self-invested personal pension (Sipp).

Dr. However, Patel felt that II had “mixed messages” about the changes.

“It creates confusion and fear and undermines confidence,” he told us.

He says about his first two e-mails from II: ‘It is not financial advice, but clear information about the rules. I followed these rules and now they say something else.’

II said that as the practical implications of the LTA changes are still being worked out, it seemed prudent to continue providing notices to people in Dr. Patel that they are required to notify HMRC if they contribute to their Sipp and have certain types of protection.

‘That is because the guidelines of HMRC are not entirely clear whether there is still a notification obligation,’ it says.

“We would like to apologize for the confusion caused and can clarify that we do not believe Dr. Patel is invalid.’ Read II’s full statement below.

HMRC confirmed that those who have applied for standing protection before the 15 March budget date will not lose the guarantees if they contribute to a pension scheme from 6 April, and reporting rules will be waived.

However, fixed protection conditions remain in force for anyone who applied for them on or after March 15, including the reporting rules and fines.

Wait for LTA changes to become law

Those on fixed protections should “hold on” and defer paying pension contributions until after the pending Finance Bill has received Royal Assent, says Gary Smith, director of financial planning for Evelyn Partners.

He notes that the 25 per cent tax-free lump sum is capped at £268,275 – a quarter of the current LTA limit – unless you have fixed protection, in which case the higher figure associated with it will apply.

That’s why people aren’t worth losing the extra tax-free money they’re entitled to under fixed protection, he says.

Mr Smith thinks it is unlikely that HMRC would impose notification fines in the case of Dr Patel, but thinks that if he is still in the cooling off period after his contributions it could be worth getting them refunded and they pay again later because of the concerns outlined above. .

“Following the Chancellor’s budget statement in March, the pensions sector is in a bit of a state of flux as we wait for the funding bill to pass through parliament and for the legislation to receive royal assent,” says Mr Smith.

Until then there is a possibility that the details will change and so I advise my clients, who are on permanent protection, to defer making contributions until Royal Assent has been granted.

Until the legislation is amended, pension providers still have a responsibility to inform their clients when protection may be lost, and the timelines for notifying HMRC and the potential tax charges that may result.

“I would encourage those with fixed protections to defer paying pension contributions until Royal Assent is given, and hopefully before Parliament’s summer recess in July.”

What does Interactive Investor say?

In response to the points raised above by Dr. Patel (whose name has been changed) regarding the LTA and its standing protection, a spokesperson for Interactive Investor said:

“The service communications to which Dr. Patel refers, has been issued to clients with very specific circumstances, highlighting their obligation to notify HMRC if they contribute to their Sipp and have certain types of protection.

‘Because the practical implications of the LTA amendments are still being worked out, it seemed sensible to continue to issue this announcement.

‘That is because HMRC’s Guidance does not make it entirely clear whether there is still a reporting obligation. Failure to report sooner would result in the fines Dr. Patel refers are mandated by HMRC, not Interactive Investor.

“Following Dr. Patel’s feedback, we agree that this communication could be alarming because it fails to reference current guidelines and LTA changes.

“Accordingly, we are reviewing this particular, very specific Service Notice to determine (a) whether it is still required and (b), if so, to amend the terminology to reflect current guidelines and the incoming changes to the LTA.

“We would like to apologize for the confusion caused and can clarify that we do not believe Dr. Patel is invalid.

“As for our wider communication on the budget changes, protections and shutdowns; our communication has been consistent and we have not changed our view of the rules currently in place as communicated to our clients, which is based on current HMRC LTA guidance. A lot of care has gone into this.’