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Growing number at risk of breaching lifetime allowance

25 March 2019

Over a million workers are at risk of breaching the pensions lifetime allowance by the time they retire, new research from Royal London has shown. This number is set to grow if there is no change to the way the allowance is calculated.

The £1.03 million lifetime limit for pension tax relief has been cut three times since 2010 and according to the mutual insurer, 290,000 workers already have pension rights above the limit and a further 1.25 million could breach it. Those who exceed the level potentially face a tax charge of up to 55% of their pension savings above this level.

The new research suggests that fewer than half of those already over the lifetime allowance have applied for protection against past reductions in the allowance and could therefore face a hefty tax bill. Almost half of those already over the limit are also continuing to add to their pension savings, running the risk of even greater tax charges.

According to Royal London, non-retired senior public sector workers are in the group most likely to be caught in the net, as a result of their defined benefit pension rights exceeding the limit, especially now they will be expected to work to 65 or beyond rather than 60 as in the past.

Other relatively well paid workers, earning in the region of £60,000- £90,000 per year, who are in a defined contribution pension arrangement are also likely to breach the limit by retirement age, the group warned.

Royal London said one of the main reasons why so many people will exceed the allowance is that the current policy is to simply increase it each year in line with price inflation. By contrast, wages will tend to grow faster than inflation and the money invested in pension pots should grow faster than inflation over the longer term, meaning the lifetime allowance will affect people more aggressively over time.

Commenting on the findings, Royal London director of policy Steve Webb 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.”

He added: “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 time-bomb. 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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