Savers are being warned to check the value of all their pension funds, as thousands of people are in danger of exceeding the new Lifetime Allowance (LTA) and could face an unexpected tax charge
The LTA is a limit on the total amount that can be held in pension funds, tax free. It will drop to 1.25 million in April 2014, and HMRC predicts that the change will affect 360,000 people in the long term - as well as 30,000 immediately. According to Standard Life, the lower limit could impact those with long service in a company pension scheme, as well as those who could become high earners in the future.
A report released today by Standard Life claims that someone set to receive a final salary pension of around £60,000 is likely to be affected by the limit. The report also outlines the choices that savers have, and the decisions they will need to make before the new lower limit comes into effect.
Savers who exceed the LTA after the change will expose up to £250,000 of their pension savings to a 55% tax charge, leading to an unexpected tax bill of up to £137,500.
These figures highlight the importance of monitoring your pension funds closely. Research carried out by YouGov for Standard Life shows that less than a fifth (19%) of people know about the LTA, and only 31% of those earning over £50,000 - the group most likely to be affected - are aware of it.
Alistair Hardie, Head of Consolidation at Standard Life, said:
“The stark reality is the reduction in the lifetime allowance is going to impact more people than first realised. And it looks as if these people are unaware of the risk of a tax charge they might be facing. Savers might be years away from retirement but if they have saved a fair amount in various pension funds they could be near the danger zone.”
“There is no one size fits all solution. Each person’s individual circumstances will require a different solution. It is important that people look at their pensions, see if they are impacted and seek professional financial advice. And the sooner they act the better. The countdown to the new LTA has now begun and it could take several weeks or months before people manage to get all their pension fund totals from their different providers.”