Pension contributions for those with fixed protection

The Spring 2023 Budget made some radical changes to pension tax rules; the key aspects were:

• the lifetime allowance was abolished
• the annual allowance (amount each individual can contribute into their pension) increased to £60,000 gross
• the income level at which an individual’s annual allowance starts to taper away increased to £260,000.

The rules were intended to help doctors and people working in the NHS, however, the impact of these reforms carries over to other high earners.

Who benefits?

A particular group who could benefit include those who have previously obtained “fixed protection”, to guarantee the lifetime allowance at a certain level.

Prior to the 6 April 2023, an individual would lose their fixed protection if they made further contributions into their pension scheme. However, from the 6 April 2023 the government have confirmed that individuals with fixed protection can make further pension contributions and not invalidate their fixed protection.

The confirmation that fixed protection will not be invalidated is an important comfort as it should mean that were a new government to reinstate the lifetime allowance (as currently stated by The Labour Party), such individuals will still be able to utilise their fixed protections in the future, based on current understanding.

The change in the rules therefore provides a tax planning opportunity for individuals with fixed protections.

Example

John has relevant earnings in 2023/24 tax year of £260,000 and is approaching retirement. He has fixed protection 2014, which maintained his lifetime allowance at £1,500,000. He has not made any pension contributions since obtaining his fixed protection.

Under the new rules, John can now make £60,000 pension contribution in 2023/24, plus a further contribution to utilise his unused allowance for the three previous tax years (for purposes of the example we have assumed an annual allowance of £4,000 is available for each of these years, due to the allowance being tapered away). He is therefore potentially able to make a total gross contribution of £72,000 and receive tax relief.

If John were to make a net pension contribution of £57,600 (£72,000 gross) utilising his 2023/24 annual allowance and unused allowance from the 3 earlier years, he would receive £18,000 tax relief in 2023/24 as well as increasing his pension pot, that will grow tax free.

The aspects of pensions are complicated, so seeking advice is essential. To discuss this, or other pension issues in more detail, please contact your usual Crowe contact or a member of our dedicated Financial Planning team.