Crucial details in yesterday’s Finance Bill draft will freeze the protected tax-free cash for those who registered for enhanced protection from 5 April, meaning no tax-free cash on future growth. Last week, Jeremy Hunt announced that lifetime allowance (LTA) charges would be abolished from 6 April 2023, and the LTA itself scrapped from 6 April 2024.
The Finance (No. 2) Bill, published this week, provides key details on how these rules will operate in 2023-24. While those with enhanced protection and fixed protection registered before 15 March 2023 can pay in new contributions to their pension plans from 6 April 2023 and keep their existing protected tax-free cash entitlement, under the new rules, the maximum amount of protected tax-free cash someone with enhanced protection can take will be restricted to the amount they could take on 5 April 2023.
Rachel Vahey, Head of Policy Development at AJ Bell, comments: “This Finance Bill is the first piece of legislative machinery needed to change the lifetime allowance rules for pensions. As expected, no-one will have to pay a lifetime allowance charge again from 6 April 2023. But it’s worth taking a close look at the detail. The Bill also has new rules for those who have previously protected a higher lifetime allowance and higher tax-free cash amount.”
Vahey explains that those with enhanced protection can now use the new higher annual allowance (AA) to top up their pensions without fearing a tax hit. However, if their protection certificate shows a tax-free cash percentage, this entitlement will be frozen on 5 April 2023. This means that none of the future growth in their pension pot, from both contributions and investment growth, can be withdrawn as tax-free cash in the future.
Vahey concludes: “These changes still allow pension savers to super-charge their pension pots over the next few years. But this crucial rule freezes the amount they can withdraw tax-free, with HMRC preventing those with enhanced protection from completely exploiting the new regime.”