New analysis by mutual insurer Royal London has shown how many of today’s workers are at risk of breaching the £1.03m lifetime limit for pension tax relief over the course of their working life, as well as the numbers who are already over the limit… but may not realise it.
The Lifetime Allowance (LTA) has been cut three times since 2010, and this report estimates that around 290,000 workers already have pension rights above the limit and well over a million more people are at risk of breaching it by the time they retire.
Those who exceed the LTA could face a tax charge of up to 55% of their pension savings above this level.
The report’s key findings are:
- Around 290,000 non-retired people have already built up pension rights in excess of the Lifetime Allowance; fewer than half of these are thought to have applied for ‘protection’ against past reductions in the LTA and so could face big tax bills when they draw their pension; many may be unaware of this;
- Almost half of these people who are already over the LTA are continuing to *add* to their pension wealth, thereby storing up an even bigger tax charge with every passing year;
- Amongst non-retired people who are not currently over the LTA, an estimated 1.25 million can expect to breach the LTA by the time they retire; the two main groups likely to breach are:
- Relatively senior public sector workers with long service, whose Defined Benefit pension rights will exceed the LTA, especially as they now have to work to 65 or beyond rather than 60 as in the past;
- Relatively well-paid workers in a Defined Contribution pension arrangement where their employer makes a generous contribution into their pension pot; typical salary levels of those affected are in the range £60,000-£90,000 per year;
- While available data suggests that only a couple of thousand people exceeded the LTA in the latest year for which figures are available (2016/17), the number likely to face a tax charge could therefore increase more than a hundredfold, purely based on those who have yet to retire but who have already exceeded the LTA.
Commenting, Steve Webb, Director of Policy at Royal London said: “This research shows, for the first time, how the drastic cuts in the Lifetime Allowance mean that large numbers of workers will now be caught by a limit that was originally only designed for the super-rich.
“It is shocking that over a quarter of a million people have already breached the LTA and that many of these are still adding to their pensions.
“They are likely to get a nasty shock – and a big tax bill – when they do finally draw their pensions. And more than a million further workers who are not currently over the LTA could find themselves in breach unless they take action.
“This is truly a Lifetime Allowance timebomb. Many workers, especially those in Defined Benefit pension schemes, will have little idea that this is an issue and could be heading for a nasty jolt. The Government needs to think hard about how to make sure people are aware of these limits in time to make alternative arrangements, and individuals need to take expert advice if they are to avoid potentially huge tax bills.”
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