'Lifetime Allowance timebomb' could hit over a million workers

More than a million people are at risk of breaching the UK Government's £1.03m lifetime limit for pension tax relief over the course of their working life, new research reveals.

The Lifetime Allowance (LTA) is a limit on the amount of pension benefit that can be drawn from pension schemes (in lump sums or as retirement income) without a tax charge. It has been cut three times since 2010.

Analysis by insurer Royal London suggests that around 290,000 workers already have pension rights above the limit and another 1.25 million are at risk of breaching it by the time they retire unless they take action.

Those who exceed the LTA could face a tax charge of up to 55% of their pension savings above this level, Royal London warned.

The research is based on a detailed analysis of data on more than 7,700 workers.

Among the 290,000 non-retired people who have already built up pension rights in excess of the LTA, fewer than half are thought to have applied for 'protection' against past reductions in the limit -- which means they could face big tax bills when they draw their pension.

What's more, almost half of those who are already over the LTA are continuing to add to their pension wealth, potentially building up an even bigger tax charge with every passing year.

Workers who are not currently over the LTA, but are likely to exceed the limit before they retire, include:

(a) Relatively senior public sector workers with long service, whose Defined Benefit pension rights will exceed the LTA, especially as they now have to work to 65 or beyond rather than 60 as in the past; and

(b) Relatively well-paid workers in a Defined Contribution pension arrangement where their employer makes a generous contribution into their pension pot.

According to the report, one of the reasons why so many people will exceed the LTA is that current policy is simply to increase it each year in line with price inflation (as measured by the CPI). By contrast, wages tend to grow faster than inflation and the money invested in pension pots should grow faster than inflation over the long term. This means that the LTA will hit more severely over time and will drag in hundreds of thousands of workers who would not regard themselves as 'rich'.

"This is truly a Lifetime Allowance timebomb," commented Steve Webb, director of policy at Royal London. "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."