How to Boost Your Pension Tax Free Cash By £44,225!

Window of Opportunity

There is a window of opportunity for those with large pension funds to boost the amount of tax free cash they can take from their pension by up to £44,225 but they have until 5th April 2025 to do so.

You can do this my applying for something called, Fixed Protection 2016 (FP2016) or Individual Protection 2016 (IP2016) or both.

Before we go into the details of FP2016 and IP2016, let’s briefly look at what is happening to the Lifetime Allowance and why applying for FP2016 or IP2016 might be beneficial.

Lifetime Allowance

To recap, the Lifetime Allowance is a limit to the amount of pension benefits that can be taken without triggering a tax charge.

In this tax year, the Lifetime Allowance still applies but the tax charge will not apply.

From 6th April 2024, the Lifetime Allowance is being abolished. However, there are going to be a few new allowances introduced as follows:

The Lump Sum Allowance - £268,275
The Lump Sum & Death Benefit Allowance - £1,073,100
The Overseas Transfer Allowance - £1,073,100

For the purposes of this article, we are going to focus on the Lump Sum Allowance.

You will notice that the Lump Sum Allowance is equivalent to 25% of the current Lifetime Allowance of £1,073,100.

Lump Sum Allowance

The Lump Sum Allowance applies whenever an individual takes a tax free lump sum from their pension benefits.

The amount of tax free cash or the tax free element of an Uncrystallised Funds Pension Lump Sum (UFPLS) is deducted from the allowance.

Where benefits exceed £268,275, the excess is taxed at the recipient’s marginal rate of tax.

So how can we take tax free cash of more than £268,275? This is where FP2016 or IP2016 comes into play.

Protection

When the Lifetime Allowance was originally introduced in April 2006, it stood at £1.5m. It increased to £1.8m in April 2010 and has steadily fallen since then albeit with a few inflation-linked increments in 2018, 2019 and 2020.

Each time the Lifetime Allowance was lowered, it was possible to preserve the higher Lifetime Allowance by applying for Protection.

Given that the Lifetime Allowance is being removed, one of the main benefits of applying for protection is to preserve a higher tax free cash amount.

Higher Tax Free Cash

By applying for FP2016, IP2016 or both, you are preserving your maximum tax free cash entitlement at 25% of the previous Lifetime Allowance of £1.25m i.e. an amount of £312,500.

This will enable you to take up to £44,225 more in tax free cash from your pension fund where your pension fund exceeds £1,073,500.

So how do these two forms of protection work.

Fixed Protection 2016

FP2016 is aimed at those who whose pension benefits will or are likely to exceed the old Lifetime Allowance when benefits are taken.

If you apply for FP2016 after 15th March 2023, you will lose Fixed Protection if:

Contributions were made to a defined contribution scheme.
There was benefit accrual under a defined benefit scheme.
You became a member of a new pension scheme (unless it was to transfer your existing benefits).
If you made certain other types of transfers, for example, potentially on divorce.

If you applied for FP2016 before 15th March 2023 and didn’t do anything to lose it before 6th April 2023, you now can’t do anything to invalidate it – in other words you can do all of the things above and still retain FP2016!

Individual Protection 2016

IP2016 is aimed at those with large pension funds that were likely to exceed the Lifetime Allowance but who were still either paying contributions themselves or were continuing to accrue benefits in a defined benefit scheme.

You could apply for IP2016 if, on 5th April 2016, you have pension benefits valued at £1m or more.

Can You Have Both Forms of Protection?

In most cases, it is obvious which form of Protection to apply for. However, by applying for both protections (assuming that you are eligible for both), it may be possible to make further pension contributions in the future, thereby breaking FP2016, but still being able to rely on IP2016 and benefitting from the higher tax free cash amount.

How To Apply

It is relatively straight-forward to do and is usually done through your Government Gateway Account.

You will have to apply before 6th April 2025.

If you have taken benefits after 5th April 2016, it may be possible to apply for protection now and have this applied retrospectively to when you took benefits. You will need to inform your pension provider.

Similarly, if an individual has died, it may be possible for their personal representatives to apply for protection.