Pension savers breaching the lifetime allowance (LTA) today are shelling out 10 times as much tax as they did in 2006 when the policy was first introduced. Here, Wealth at Work outlines three types of employee at risk of breaking the rules...
The latest figures found that some £110m in tax was collected from individuals exceeding the allowance in 2016/17, up from less than £10m in 2006.
Wealth at Work, a provider of financial education and guidance in the workplace, said taxpayers breaching the LTA typically fell into one of three categories.
In the first instance, the business said many employees may be "blissfully unaware" their pension pot is valued at or above the current LTA limit of £1.03m.
It said this could particularly affect those who never check their pension value, or have not done so for some time.
In fact, it pointed out many employees in defined benefit (DB) pension schemes are unaware their pot is valued at 20 times their annual pension for LTA purposes. An annual pension of £30,000 would, therefore, have a value of £600,000.
If they then decided to take advantage of pension freedoms and transfer said DB scheme, the transfer value could be as high as 40 times the annual pension. In this example, an annual pension of £30,000 could have a transfer value of £1.2m and therefore exceed the LTA, it explained.
Long way off the LTA
Those who mistakenly think they are a long way off from breaching the LTA was a second scenario put forward by the firm. It said this was a danger, in particular, for employees making healthy contributions into their scheme and perhaps receiving matching contributions. Positive pension fund growth, as well as a pay rise may easily push them over the LTA before they knew it, the business warned.
For example, someone aged 45 could have a pension fund of £400,000 and a salary of £50,000, saving 5% of their salary into their pension, rising by 3% per annum. If they then received employer contributions of 10%, rising by 3% per annum, it is possible for their pension fund to reach £1,670,000 by the time they retire at 65.
Thirdly, employees who have taken protection measures and opted out of their workplace pension scheme to safeguard their savings from an LTA charge could still be at risk due to auto-enrolment regulations stipulating workers must be re-enrolled every three years.
One month's contributions could invalidate a previously applied for protection without employees realising, Wealth at Work said.
To avoid or reduce the impact of the LTA, the adviser suggested employees should reassess their current situation, including their pension pot valuation and how much has been accumulated via multiple pots. Employees could also consider alternative tax-efficient savings vehicles, it said, such as an ISA or workplace share schemes.
Director Jonathan Watts-Lay said: "Reaching the LTA could be closer than many employees think. For example, they may have a number of pension schemes that when combined with their current pension provision, could exceed the allowance. The tax implications could be drastic and could lead to potentially many being hit with unexpected and sometimes unnecessary tax bills."
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