The pension pots of around 290,000 UK workers have already surpassed the Lifetime Allowance (LTA), meaning that they could face a hefty tax on any additional retirements savings.
In addition to those already past the point of no return, research by mutual insurer Royal London has revealed that there are around 1.25 million people at risk of breaching the LTA by the time they retire.
This is because senior and well-paid employees with defined benefit or defined contribution pension schemes have either already gone over the current limit, or are set to do so.
Many of those at, or near, the LTA are also continuing to pay into their pensions and unintentionally adding to their own tax burden.
At its peak, the LTA was £1.8m. Severe cuts have seen it fall to £1.03m ($1.36m, €1.2m), but it is set to rise to £1.05m in April 2019.
Savings up to that sum are tax free, but any thing over risks being hit with a charge of 55%.
Need for tax simplification
“Pension taxation is never popular, but this is no longer just about politicians winning over older voters,” Jon Greer, head of retirement policy at Quilter, told International Adviser.
However, the “simplification of the tax system could help address many of these issues”, he added.
Steve Webb, director of policy at Royal London, said: “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.”
Lifetime Allowance is a ‘timebomb’
“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,” Webb added.
“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.”
