When the lifetime allowance was introduced in 2006 to cap all tax-relieved pension savings, we were led to believe it would increase for five years to £1.8m.
It would then be reviewed by Treasury Order and it was expected that the allowance would rise further.
This was clearly not to be. It did reach £1.8m but that cap was short-lived, and we are now awaiting a drop to £1m. But this may be in doubt, depending on the outcome of the Budget green paper on pension savings, which could remove or amend the lifetime allowance tests entirely.
The introduction of the allowance saw the start of the first two transitional protections of pension savings, with many more to follow.
Primary protection was available to anyone with pension benefits in excess of £1.5m, including those already in payment, and gave a multiple of the standard lifetime allowance. It did not place any restriction on contributions going forward, so an individual was able to remain an active member of a pension scheme.
It should be remembered that it isn’t possible to opt out of primary protection at any point.
Enhanced protection was available to anyone and offered full protection from lifetime allowance charges in exchange for not paying future contributions or having any relevant benefit accrual, which generally meant opting out of all pension schemes.
It was possible to hold enhanced and dormant primary protection at the same time. This gave the individual the option to rely on primary protection if they lose or choose to opt out of enhanced protection. Losing enhanced protection would occur if a contribution was paid or relevant benefit accrual occurred in excess of the permitted level.
In addition, it was possible to protect any pre-A-day (April 6 2006) tax-free cash entitlement alongside primary and enhanced protection if it was worth more than £375,000. Primary protection preserved a monetary amount, whereas enhanced protection safeguarded a percentage of the overall benefits.
When the lifetime allowance was initially reduced from £1.8m to £1.5m in 2012, a new type of protection came about called fixed protection, which secured the allowance at £1.8m for those that applied. It is similar to enhanced protection because of the restriction on future contributions and benefit accrual and the fact that anybody could apply for it.
It is again possible to lose the protection if an individual contributes or receives relevant benefit accrual. However, the test is slightly different for fixed rather than enhanced protection and means it could be lost at any point, even in a defined benefit scheme rather than just at transfer or crystallisation – or receipt – of benefits.
This was repeated in 2014 when the lifetime allowance dropped to £1.25m, protecting at £1.5m, and will again be available when it falls further to £1m in 2016, protecting at £1.25m.
Fixed protection always needs to be applied for before the actual decline in the lifetime allowance, so until fixed protection 2016 is available it isn’t possible to apply for this option.
