Pension Savers Sleepwalking Into Big Tax Penalties

Thousands of retirement savers facing a cap on the lifetime pension allowance only have a few weeks to make some major financial decisions or face a huge tax charge, according to a financial firm.

Around 360,000 pension savers have to act to protect their lifetime allowance (LTA) as the ceiling drops from £1.5 million to £1.25 million in April.

However, according to Standard Life, thousands could miss the deadline because they have not bothered to gather the financial information they need in time.

Retirement servers who miss the chance could face a 55% tax charge on the £250,000 difference between the two limits – a massive £137,500 tax penalty.

Standard Life has calculated that investment growth for someone approaching retirement in 10 years with a pension pot of £700,000 or a final salary pension of £60,000 a year could break the LTA limit and face the tax penalty.

Lifetime allowance protection

The government has offered pension protection to retirement savers, who may breach the limits, but Standard Life’s research shows fewer than 20% of pension investors are aware of the LTA and almost a third of those earning more than £50,000 and facing the tax penalty know their savings are at risk.

Alistair Hardie, of Standard Life, said: “These pension savers will need to value their pension funds and work out how investment growth might impact the LTA.

“If they have several separate providers and need this information, they might find this could take weeks to put together. Even then, they may need to speak to an adviser to see how this will affect their LTA.

“Because of the enormous sums of money at risk, these savers should start the exercise as soon as possible or they could run out of time and miss the opportunity to protect their pensions.”

Tough savings decisions

The scope of the work required for some pension savers is vast – Department of Work and Pension research shows that most retirement savers have an average 11 employers.

If someone belonged to a pension scheme for each employer, they would need a fund valuation and investment projection from every scheme.

“Pension savers could easily find themselves facing a tax charge simply because they are unaware of the rule change,” said Hardie. “Even when they have all the pension figures, they need to work out whether to take individual, fixed protection or continue saving as they are regardless of the tax charge.

“To make sure they can make the right decision, they need all this information by the end of February – and that is only a few weeks away.”

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