I took out fixed protection years ago and stopped paying in contributions from March 2016. 

My SIPP fund is now worth £1.5 million. I have heard the rules have changed and I can now start paying in? Is that right? And if so, do the usual rules apply to my pension fund and I can take a quarter of it as tax-free cash? 

Also, I joined a new employer five years ago. I opted out of the pension scheme, but does this change mean I can now join?

Steve

Rachel Vahey, AJ Bell Head of Public Policy, says:

The lifetime allowance controls how much money you can take out of your pension tax efficiently. Up to April last year, if you took out more than the lifetime allowance there was a lifetime allowance tax charge applied to the excess.

The rules changed last April. For this tax year – 2023-24 – if you go over your lifetime allowance there isn’t an additional tax charge to pay if you take the money as an income, for example as income drawdown. (But of course, you would still be taxed on any withdrawals as income.) If you take the excess as a lump sum, then that would face income tax at your marginal rate.

When the lifetime allowance was first introduced back in April 2006 it was set at £1.5 million. Over the next five years it rose steadily to £1.8 million in 2010.

However, successive governments cut the allowance – first to £1.5 million in 2012, then £1.25 million in 2014 and finally £1 million in 2016. Every time it was cut protections were put in place to prevent those with substantial funds losing out.

You chose to take one of these protections. Having fixed protection 2016 means you get to keep the old higher lifetime allowance of £1.25 million (instead of having to test your pension funds against today’s lower amount of £1,073,100) and the maximum tax-free cash you can take is a quarter of that amount, £312,500.

However, to keep this higher lifetime allowance, no more contributions could be paid into your pensions from 6 April 2016 onwards. This included contributions from an employer under automatic enrolment. It looks like you have kept your end of that bargain. 

WHAT 2023 CHANGES MEAN

In March 2023, the chancellor announced he was going to abolish the lifetime allowance. He started by scrapping any lifetime allowance charge (as I explained above), and the lifetime allowance will disappear completely from 6 April 2024.

As part of these changes, anyone who had registered for fixed protection before 15 March 2023 (as discussed there are three different types – 2012, 2014 and 2016) or enhanced protection can start to pay into their pension schemes again.

Normally, people can take as tax-free cash (pension commencement lump sum) 25% of their pension fund up to the lifetime allowance of £1,073,100, that is a maximum of £268,275. Those who took fixed protection, however, get to keep their higher tax-free cash amount of (in the case of fixed protection 2016) £312,500.

So even though you could now pay more money into your pension you won’t be able to take a higher tax-fee cash amount – you will still be restricted to £312,500. You will receive tax relief on contributions on the way in, and the money will be invested in a tax-efficient environment. But any money you take out as income will also be taxed.

FLEXIBILITY TO JOIN WORKPLACE SCHEME

However, lifting the ban on paying in contributions also means people with fixed or enhanced protection can now join their employer’s pension scheme and benefit from receiving their employer’s pension contributions as well as their own, which they won’t have been able to do for the last decade or so. And that is worth considering.

They may be able to opt into the pension scheme at any point (and can check by asking the employer). But failing that the employer has to re-enrol them every three years.

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