NHS Pensions – have you protected your tax-free lump sum?
NHS Pensions – have you protected your tax-free lump sum?
While the lifetime allowance (LTA) has been abolished, applying for individual protection allows you to take 25% of your protected amount as a tax-free lump sum.
The LTA
The pension LTA was originally introduced in 2006 and went through one increase and then several reductions until it was finally abolished at 5 April 2023. Each time the LTA changed, individuals were allowed to apply for ‘protection’ of their previous entitlements – both the pension fund limit and the related limit on their tax-free cash.
Although the LTA has been abolished, since April 2023 the maximum amount of tax-free cash pensioners can take is fixed at £268,275 (25% of the prior LTA of £1,073,100) and this allowance has now been renamed the ‘Lump sum and death benefit allowance’. But some individuals may be able to fix their tax-free lump sum limit at higher amounts - up to £312,500.
Individual protection 2016 (IP16) deadline
As long you had total pension savings valued at £1m or more at 5 April 2016 it is still possible to apply for IP 2016.
Originally, there was no deadline on applying for IP16, it only had to be requested online before the individual took any form of pension benefits. However, with the abolition of the LTA, the government has now announced a general deadline of 5 April 2025 to apply.
Extended deadline for GPs with remediable service
Regulations will be made to extend this new deadline for making an application until 5 April 2027 for individuals who have ‘remediable service’. If you were a member of the new scheme (the 2015 NHS Pension Scheme), before April 2022 and you were previously in a legacy scheme i.e., 1995 NHS Pension Scheme or 2008 NHS Pension Scheme you will be affected by the public service pensions ‘remedy’.
If, as a result of the remedy, the value of a member’s total pension rights on 5 April 2016 is more than £1million, they can apply for IP 2016.
Impact of applying for protection
Even if you have already applied for IP 2019, it is still important to identify any increase in the fund value at 5 April 2016 that occurs as a result of the remedy HMRC has confirmed that once protection has been applied for, and granted, the amount of the protection can be updated to the post remedy value. HMRC have provided the following example:
“… a deferred choice member had total pension rights of £1.05 million (based on legacy accrual) and received individual protection 2016 on that basis. In 2029, that member makes a new scheme benefits election which increases that value of their pension rights as at 5 April 2016 to £1.1 million. The member can tell HMRC about the revised values of their pension rights and their individual protection 2016 will be changed accordingly”.