Devil in the detail of pension reforms as Finance Bill restricts enhanced protected tax-free cash

Crucial details included in yesterday’s Finance Bill draft will, from 5 April, freeze the protected tax-free cash for those who registered for enhanced protection, meaning no tax-free cash on future growth.

Jeremy Hunt last week announced lifetime allowance (LTA) charges will be abolished from 6 April 2023, and the LTA itself scrapped from 6 April 2024.

The Finance (No. 2) Bill, published this week, sets out key details about how these rules will operate in 2023-24.

Those with enhanced protection and fixed protection registered before 15 March 2023 can from 6 April 2023 pay in new contributions to their pension plans and keep their existing protected tax-free cash entitlement… but, 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.

“Those with enhanced protection will be able to take advantage of the new higher annual allowance (AA), allowing them to top-up their pension without fear of a tax hit. But if their protection certificate shows a tax-free cash percentage, then this entitlement will be frozen on 5 April 2023.

“In effect, it means that none of the future growth in their pension pot, from both contributions and investment growth, can be withdrawn as tax free cash in the future.

“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.”