A freedom of information request submitted by LCP revealed that new applicants for lifetime allowance (LTA) protection have trickled down to 4,000 in the last year.
The firm said the lack of applicants was a concern after Chancellor Rishi Sunak announced a five-year freeze on LTA pension contributions over £1m earlier this year.
The set of rules allow people to ‘protect’ themselves against cuts in the LTA for pension tax relief, and even includes protection for individuals after they have died.
LCP said some people may be “missing out” and could face “unnecessary” tax bills.
Steve Webb, partner at LCP, said: “Limits on pension tax relief have been cut repeatedly in recent years and savers who planned on the basis of much higher limits can find themselves on course for large tax bills when they start to draw their pensions.
“Anyone whose pensions already exceed the lifetime allowance or who thinks that they might to do so in future should check to see if applying to HMRC for protection would be to their benefit”.
The FOI showed that more than 325,000 people had taken advantage of LTA protections since its creation in 2006.
Individuals who think they may be eligible can apply for Fixed Protection 2016 or Individual Protection 2016.
The Fixed Protection 2016 allows people to lock in the ‘old’ LTA of £1.25m after it was cut from £1.25 to £1m. However, if someone who chose Fixed Protection 2016 was subsequently automatically enrolled into a workplace pension and did not opt out, their protection would be invalid.
While the Individual Protection 2016 is for those who already had pensions valued at over £1m and allows them to lock in a personalised LTA for the value for their pension at the time. This allows people to save more into a pension without losing the protected LTA, apart from exceptional circumstances such as a divorce.
More than 27,500 people have opted for IP 2016 and around 44,800 have locked in FP 2016.
Since LTA can get complex, seeking financial advice before applying is highly recommended.
Earlier this year, Neil MacGillivray, head of technical support at James Hay said that it was “instinctive” that clients want to avoid tax charges, but when it comes to solving a LTA issue, “kneejerk reactions” could result in negative outcomes.