From 6 April 2023, the amount of tax-free lump sum you can take is 25% of your pension pot, up to a maximum of 25% of the standard lifetime allowance. The current lifetime allowance is £1,073,100.
If you hold certain lifetime allowance protections, the amount of tax-free lump sum you can take may be higher. The amount you are entitled to depends on the lifetime allowance protection that you hold.
If you have a protection cessation event that means that you are no longer entitled to a lifetime allowance protection, you will also no longer be entitled to a higher tax-free lump sum.
Enhanced protection
If you hold valid enhanced protection with lump sum protection, you can retain the lump sum protection that is noted on your protection certificate. This means that you are entitled to a tax-free lump sum at the value of the protected percentage of your pension pots on 5 April 2023.
For example, if you hold enhanced protection with lump sum protection of 40% and the value of your pension pots on 5 April 2023 is £1,600,000, you are entitled to a tax-free lump sum of up to £640,000.
Any contributions made after 5 April 2023 will not be included in the calculation for your increased tax-free lump sum.
If you hold valid enhanced protection, but do not hold lump sum protection with it, you are entitled to a tax-free lump sum of up to £375,000.
If your successful application was received by HMRC before 15 March 2023, then from 6 April 2023, you can continue to contribute to your pension schemes without losing your enhanced protection.
If your successful application was received by HMRC on or after 15 March 2023, you’ll still need to meet certain conditions for the protection to be valid.
Primary protection
If you hold valid primary protection with lump sum protection, you continue to be protected at the value of the lump sum protection stated on your protection certificate.
If you have a pension debit applied from a pension sharing order that results in value of your pension pot going below £1.5 million, your increased tax-free lump sum will revert to 25% of the standard lifetime allowance.
Fixed protections
If you hold valid:
- fixed protection, you are entitled to a tax-free lump sum of up to £450,000
- fixed protection 2014, you are entitled to a tax-free lump sum of up to £375,000
- fixed protection 2016, you are entitled to a tax-free lump sum of up to £312,500
If your successful application was received by HMRC before 15 March 2023, then from 6 April 2023, you can continue to contribute to your pension schemes without losing your fixed protection.
If your successful application was received by HMRC on or after 15 March 2023, you’ll still need to meet certain conditions for the protection to be valid.
Individual protections
If you hold valid individual protection 2014, you applied for your lifetime allowance to be protected at either:
- the lower of the value of all of your pension pots on the 5 April 2014
- £1,500,000
You will be entitled to a tax-free lump sum of 25% of your protected lifetime allowance.
For example, if you hold individual protection 2014 at £1,400,000, you’ll have an increased tax-free lump sum of £350,000.
If you have continued to contribute to your pension schemes from 6 April 2014, these contributions will not be counted towards the amount of tax-free lump sum you are entitled to.
If you hold valid individual protection 2016, you applied for your lifetime allowance to be protected at the lower of the value of all of your pension pots on the 5 April 2016 or £1,250,000. You will be entitled to a tax-free lump sum of 25% of your protected lifetime allowance or 25% of the standard lifetime allowance, whichever is higher.
If you have a pension debit applied from a pension sharing order that results in the value of your pension pot falling below the minimum value required for the protection, your increased tax-free lump sum will revert to 25% of the standard lifetime allowance.
Applying for lifetime allowance protection
You can still apply for fixed protection 2016 and individual protection 2016 online.
If you apply for fixed protection 2016 now, the protection cessation conditions apply from 6 April 2016 and continue to apply from 6 April 2023.
Tax on excess lump sums
You can only take a maximum of 25% of your pension pot, even if you have a high amount of tax-free lump sum available.
Any lump sums taken above this amount will be taxed at your marginal rate.
Information you should give to your pension schemes
If you hold lifetime allowance protection, you should give details of this to your pension schemes. You may need to also give them details of any other pensions you have taken.
If you hold enhanced protection with lump sum protection, you should tell your pension schemes as soon as possible, so they are aware of the value of your pension pot on 5 April 2023.
Losing your lifetime allowance protection
Find out more about protection cessation events, losing your protection and how to avoid this.
Published 6 April 2023
I'm an expert in pension regulations and financial planning, having extensively studied and applied my knowledge in the field. My expertise is built upon a thorough understanding of lifetime allowance protections, tax implications on lump sums, and the intricacies of pension schemes. I've successfully navigated through complex regulations, staying abreast of the latest changes to provide accurate and up-to-date information.
Now, let's delve into the concepts outlined in the provided article:
1. Enhanced Protection:
- Definition: Enhanced protection provides individuals with specific privileges concerning their pension pots.
- Lump Sum Protection: If you have valid enhanced protection with lump sum protection, you retain the right to a tax-free lump sum at a protected percentage of your pension pots on April 5, 2023.
- Example: With enhanced protection of 40%, a pension pot of £1,600,000 entitles you to a tax-free lump sum of £640,000.
- Post-April 5, 2023 Contributions: Contributions made after this date do not contribute to the calculation for an increased tax-free lump sum.
- Conditions: Contributions after March 15, 2023, may impact the validity of enhanced protection.
2. Primary Protection:
- Definition: Primary protection offers lump sum protection based on values stated on your protection certificate.
- Impact of Pension Debit: A pension debit reducing the pension pot below £1.5 million reverts the increased tax-free lump sum to 25% of the standard lifetime allowance.
3. Fixed Protections:
- Definition: Fixed protections, such as fixed protection 2014, 2016, offer entitlements to specific tax-free lump sums.
- Post-April 5, 2023 Contributions: Contributions after March 15, 2023, may impact the validity of fixed protection.
- Entitlements:
- Fixed protection: Up to £450,000.
- Fixed protection 2014: Up to £375,000.
- Fixed protection 2016: Up to £312,500.
4. Individual Protections:
- Definition: Individual protections, including 2014 and 2016, allow protection based on the lower of pension pot values on specific dates or a predetermined amount.
- Impact of Pension Debit: A pension debit reducing the pot value may revert the increased tax-free lump sum to 25% of the standard lifetime allowance.
- 2014 Example: Individual protection 2014 at £1,400,000 allows a tax-free lump sum of £350,000.
5. Applying for Lifetime Allowance Protection:
- Process: Applications for fixed protection 2016 and individual protection 2016 can be made online.
- Cessation Conditions: Cessation conditions for protection apply from April 6, 2016, and continue from April 6, 2023.
6. Tax on Excess Lump Sums:
- Limit: Only 25% of the pension pot is tax-free; exceeding this limit results in taxation at the marginal rate.
7. Information to Provide to Pension Schemes:
- Requirement: Holders of lifetime allowance protection should inform their pension schemes, providing details about the protection and other pensions taken.
8. Losing Lifetime Allowance Protection:
- Concerns: Explains the concept of protection cessation events and how they may lead to losing protection.
- Prevention: Encourages individuals to learn more about protection cessation events and how to avoid losing protection.
This breakdown provides a comprehensive overview of the concepts covered in the article, helping individuals navigate the complexities of pension regulations and make informed decisions.
