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1.25m workers could face unexpected pensions tax bill

Written by: Danielle Levy
More than a million workers are at risk of breaching the government’s £1.03m Lifetime Allowance (LTA) for pension tax relief – and many may not even realise.

Analysis by insurer Royal London estimates that 1.25m UK workers are on course to breach the LTA by the time they retire, which is the maximum amount of pension savings you can build up in your pension pot without a tax charge.

For those who exceed this limit, the tax charge levied will depend on how the income is taken: 55% if taken as a lump sum or 25% if it is taken as income.

These workers are likely to be relatively senior, long-serving public sector workers with defined benefit pension schemes, as well as well-paid workers in defined contribution pension schemes, who have benefited from generous contributions from their employer over time. Royal London estimates that they are likely to earn between £60,000 and £90,000 per year.

The research found that around 290,000 non-retired people have already breached the LTA – and fewer than half have applied for ‘protection’ against past reductions in the lifetime limit. This means they potentially face big tax bills when they draw their pension and may be unaware of this.

What’s more, more than half of this group of workers who have already breached the LTA continue to add to their pension as they are unaware, adding to the potential tax charge they are going to face at retirement.

Royal London pointed out that one of the reasons why so many people are on course to exceed the LTA is because the government increases it each year in line with consumer price inflation (CPI).

By contrast, wages tend to grow faster than inflation and the money invested in pension pots is likely to grow faster than inflation over the long-term. This means hundreds of thousands of workers will get caught out by the limit – many of whom would not regard themselves as wealthy.

Lifetime Allowance timebomb

Steve Webb, director of policy at Royal London and former, referred to the growing trend as a “Lifetime Allowance 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.”

He added that the government needs to think hard about how to make people aware of these limits, so they are able to make alternative arrangements in good time.

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