The Lifetime Allowance was introduced on 6 April 2016 and since then it has applied to the total of all the tax-free pension savings an individual has, including the value of pensions promised through any defined benefit schemes. Note that the State pension is not counted against the Lifetime Allowance. At that time the Lifetime Allowance was £1,500,000.
Individuals are tested against the Lifetime Allowance when a benefit crystalisation event occurs. There are 12 such events, including death and becoming entitled to receive a scheme pension. A tax charge (of up to 55% – albeit the way the charge applies depends on whether you receive the money from your pension as a lump sum or as part of regular retirement income) is levied on the value of the payouts from the individual’s pension pot(s), including the value of the payouts from any defined benefit schemes, that exceeds the lifetime allowance.
The lifetime allowance, is currently £1,030,000 and will increase to £1,055,000 for the tax year 2019/2020 (an increase which is in line with the rise in the Consumer Prices Index this year).
It is true that the Lifetime Allowance only affects a limited number of people. However, some reports we have read suggest that many savers in the middle of their working lives could actually be on track to breach the allowance without investing another penny – apparently a 30 year old with a pension pot of £360,000 could already be on track to breach the lifetime allowance by the age of 67. As pensions are normally a long term commitment, what might appear modest today could exceed the lifetime allowance by the time you want to take your benefits.
The introduction of and subsequent reductions to the Lifetime Allowance posed a problem for pensions savers who already had pension savings in excess of the newly introduced limit. As a result HMRC protections were offered to such people. In order to achieve protection against the Lifetime Allowance the individual must make a successful application to HMRC, which in turn needs to be granted. At which time a certificate will be issued to the individual. There have been various different types of protection available since the Lifetime Allowance was introduced:
- Primary Protection
- Enhanced Protection
- Fixed Protection 2012
- Individual Protection 2014
- Fixed Protection 2014
- Individual Protection 2016
- Fixed Protection 2016
The only two which are currently available are:
- Individual Protection 2016
- Fixed Protection 2016
It’s not the end of the story once protection has been granted though. Protection can be lost. The Money Advice Service website states that “The protection rules are complicated. And the ways in which the protection can be lost differ depending on whether your retirement income (including lump sums) is provided from a defined contribution, or a defined benefit pension scheme“. Indeed, simply being admitted to an auto-enrolment compliant scheme would be sufficient for someone to lose their HMRC protection. It’s easy to see how some people accidentally lose their protection. This was the subject of a recent appeal to the First Tear Tribunal by Mr Hymanson. Mr Hymanson was granted fixed protection in 2012. However, he failed to stop monthly direct debits to two of his pension schemes until April 2015. His certificate of protection was consequently revoked by HMRC as he had failed to satisfy the conditions of paragraph 14, Schedule 18 of the Finance Act 2011 by accruing further benefits in a registered pension scheme.
Mr Hymanson claimed this was a simple mistake and those payments should be set aside as though they had not been paid. HMRC did not accept this argument, resulting in Mr Hymanson’s appeal to the First Tier Tribunal.
In considering the relevant issues the First Tier Tribunal referenced the principle established in Pitt v Holt that a voluntary disposition (in this instance a voluntary payment of contributions to the schemes) could be set aside on the grounds of mistake provided such action would be appropriate in the circumstances. In order to rely on this principle it is necessary to evidence that the mistake was the cause of the disposition and the gravity of the mistake must be considered.
The facts of this case seem to play a large role in the conclusion. In this instance the additional contributions paid by Mr Hymanson added up to just £7,000, whereas the loss he faced as a result of losing the fixed protection was estimated to be in the region of £50,000. Had he realised the consequences it is inevitable that he would have stopped the direct debit payments to the pension schemes. The First Tier Tribunal commented that it was “clearly a totally disproportionate loss of tax”. The First Tier Tribunal concluded, based on the equitable maxim that “that which should be done should be treated as having been done”, that the High Court, if the case were escalated to it, would order for rescission of the contributions and reinstatement of the fixed protection.
Of particular interest was the statement by HMRC that they would have been prepared to rescind the pension payments in the event that they had been paid erroneously by a bank (contrary to the individual’s instructions) but had not considered whether rescission would be a proper course of action in the event of a mistake by the pension scheme member. We expect there are many other individuals who have lost their Lifetime Allowance protection as a result of mistaken payments to pension schemes, and that there will be many more cases brought against HMRC for different circumstances which have led to protection being lost.