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.
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.
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.
There could be many employees in Defined Benefit (DB) pension schemes that 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.
‘Long Way Off’
Those who mistakenly think they are a long way off from breaching the LTA is another potential scenario. This was a danger, in particular, for employees making healthy contributions into their scheme and perhaps receiving matching employer contributions. Positive pension fund growth, as well as a pay rise may easily push them over the LTA before they knew it.
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 possibly realising.
Director of Wealth at Work 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.”
The good news is there are strategies available to avoid or reduce the impact of the LTA – particularly if you plan in advance. At Mantles we have helped numerous clients reduce potential LTA charges allowing more of their pension pots to be used for retirement income, or passed down after death to loved ones in a very tax efficient way.
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