Now, thousands are facing tax bills in the hundreds of thousands of pounds because they breached the limits of their respective protections.
The LTA refers to the total tax-free pension savings an individual can accrue over their lifetime.
As the word suggests, fixed protection ensures that a person is not penalised by the reductions in the allowance and are able to retain an earlier, more generous threshold.
The pension saving restriction was introduced in 2006 by the then-Labour government, as part of its tax simplification programme.
Initially, the allowance grew for four years, but it was then cut periodically from £1.8m ($2.3m, €2.1m) in 2010 to the current £1.05m.
Following all of the changes, nearly 300,000 people who have breached their savings limit.
Under current rules, the LTA will rise by the rate of the consumer price index (CPI) each year.
There are four types of protections: enhanced and fixed protection dating to 2012, 2014 and 2016 – each relating to a year the LTA was reduced.
People can still apply for the 2016 fixed protection, but the previous two are not available any longer.
“The lifetime allowance is a pernicious tax which effectively punishes defined contribution savers who enjoy strong investment performance,” said Tom Selby, senior analyst at AJ Bell.
“Successive cuts to the allowance in recent years have created a complex web of protections designed to protect people close to the lifetime limit from being unfairly penalised.
“A number of these protections come with terms and conditions – namely that you are no longer allowed to contribute to a pension scheme. If you do, the protection is lost, and you could face a huge tax bill on the excess.
“For example, someone with a £1.25m fund who took out fixed protection 2016 and subsequently lost it in the 2018/19 tax year would face a tax bill of £121,000 on the excess.”
Tribunal protecting savers
Selby added: “While we don’t know the exact reasons for all of the protection breaches, we have seen a particular spike since 2017, coinciding with the roll-out of the reforms to smaller businesses.
“It is likely a significant proportion of these people accidentally broke the terms of their protection by failing to opt-out of their workplace scheme, either initially or at their re-enrolment date three years later. For these people the massive resulting tax bill will be a bitter pill to swallow.
“However, in a recent First-tier Tribunal ruling the judge decided a man who had accidentally voided his lifetime allowance fixed protection by failing to cancel a contribution standing order should have the protection reinstated.
“If HMRC is unable to get the ruling overturned at appeal, it may mean thousands of pension savers who have had their protection certificate revoked are knocking on its door asking for their money back.”