The £1.5m lifetime allowance on pension saving should be scrapped as it is a barrier to effective long term retirement saving, a provider has said.
Skandia said the lifetime allowance penalised good investment performance and while £1.5m sounds like a high sum it could affect ordinary savers who begin contributing early in their career.
It said if someone began saving at 25 and intended to retire at 65 they would build up 40 years' of contributions. If they invest £509 gross, which equates to just £363 net for a higher rate tax payer, their pension savings could breach the current £1.5m lifetime allowance threshold by the time they reach retirement.
This level of contribution is assumed to rise by 3% a year, and an investment growth rate of 7% is achieved.
If growth is even higher as a result of excellent investment choices and a well managed portfolio, then the investor will be penalised with a tax charge of up to 55% on any excess above the £1.5m.
Skandia pension expert Adrian Walker said the current £50,000 annual allowance negated the need for a lifetime cap.
"The lifetime allowance effectively caps good investment performance and will penalise those who have managed their investments well.
"Young people are being told to take responsibility for their future and start saving early towards retirement. If someone is successful in their career, and they are prudent in their savings, this cap is clearly going to penalise them.
"At a time when the government should be doing more to attract people towards saving for their retirement, they should look to remove barriers which could act as a detriment," he said.
Government has reduced the lifetime allowance from £1.8m to £1.5m. It has not announced any intention to review the limit, or increase it in line with inflation.
Skandia warned at this level, the cap "will become a real barrier for a considerable number of savers".
Risk to retail investors
Joined as head of strategy, multi asset, in June
Group income protection