On the go: Over 12,000 pension savers have breached lifetime allowance ‘protections’ in the past 12 years, leaving them to face tax bills running into hundreds of thousands of pounds.
An AJ Bell Freedom of Information request revealed that over 12,000 investors have notified HM Revenue & Customs that they have lost one of the various forms of lifetime allowance protection introduced since ‘A-Day’ in 2006.
Each time the lifetime allowance has been cut since, a new set of transitional protection rules has been created.
There are four types of protection that can be lost when a member contributes to a pension scheme: enhanced protection, fixed protection (2012), fixed protection (2014) and fixed protection (2016).
Tom Selby, senior analyst at AJ Bell, commented: “The lifetime allowance is a pernicious tax which effectively punishes defined contribution savers who enjoy strong investment performance.
“For example, someone with a £1.25m fund who took out fixed protection 2016 and subsequently lost it in the 2018-19 tax year would face a tax bill of £121,000 on the excess.”
Some people may go accidentally over the limits through auto-enrolment or GMP equalisation with around 7,000 breaches having been recorded since the introduction of auto-enrolment.
There is hope for some high earners caught in the net; Mr Selby said: “In a recent First-tier Tribunal ruling, the judge decided a man who had accidentally voided his lifetime allowance fixed protection by failing to cancel a contribution standing order should have the protection reinstated.
“If HMRC is unable to get the ruling overturned at appeal, it may mean thousands of pension savers who have had their protection certificate revoked are knocking on its door asking for their money back.
“Whether it is doctors being hit with tax bills for breaching the annual allowance taper or savers losing fixed protection after contributing to a pension, it’s clear the inherent complexity of the pensions system is causing problems for higher earners."
He concluded: “The government should review the pension tax regime and consider simpler alternatives which don’t unnecessarily hamper those doing the right thing and saving for retirement."
