An estimated 1.25 million people can expect to breach the £1.03m lifetime allowance (LTA) before they retire, research by Royal London has indicated.
Some 290,000 workers already have pension rights above the lifetime limit, the life company says, and fewer than half of those are thought to have applied for ‘protection’ against past reductions in the LTA.
As such they could face big tax bills when they draw their pension – those who exceed the LTA could face a tax charge of up to 55% of their pension savings above £1.03m.
The LTA has been cut three times since 2010. Most recently, in 2016 it was cut from £1.25m to £1m. The LTA rises in line with inflation and, as such, is currently set at £1.03m.
According to Royal London, people typically likely to breach the LTA include relvatively senior public sector workers with long service, whose defined benefit (DB) pension rights will exceed the LTA.
They also could be relatively well-paid workers in defined contribution pension arrangements where their employer makes a generous contribution into their pension pot. Those affected typically earn between £60,000 and £90,000.
Royal London director of policy Steve Webb (pictured) said: “It is shocking 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.
“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 LTA timebomb. Many workers, especially those in DB pension schemes, will have little idea this is an issue and could be heading for a nasty jolt.”
He warned: “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.”