Thousands missing out on protection from 55pc tax bills

Thousands of pension savers could be missing out on protection against punitive 55pc tax charges.

More than 7,000 people were handed tax bills totalling £283m for breaching the limit on pension savings in 2018-19 , an average of £40,000 each. The “lifetime allowance” is the maximum amount that you can have in your pension pot before tax becomes payable, currently £1,073,100.

Taking any excess pension money above the limit triggers a 55pc tax bill if taken as a lump sum, or 25pc if drawn as income.

However, a large number of savers can apply for “protection” which shields their pension. Successive cuts to the lifetime allowance sparked a backlash from those already close to the threshold. In response HM Revenue & Customs introduced protections for those who exceeded it.

For example, the lifetime allowance was reduced from £1.25m to £1m in April 2016 but those close to, or already exceeding the limit at the time, were allowed to apply to be exempted from the reduction and retain the previous limit. Nearly 72,000 people have protected their pension against the 2016 lifetime allowance change, a Freedom of Information request submitted by LCP, a consultancy, has revealed. In total, 325,000 people have taken advantage of the special rules since 2006. Just 4,000 people registered for protection in 2020. More than 290,000 workers already have pension wealth above the lifetime allowance but have not yet triggered the tax charge.

Sir Steve Webb, former pensions minister and now partner at LCP, said many people may face unnecessary tax bills. “These limits have been cut repeatedly and savers who planned on the basis of much higher limits find themselves on course for large tax bills when they take their pensions,” he said.

More than 1.25 million people are projected to breach the allowance, according to Royal London, the pension provider. Many more could be caught out after the Chancellor imposed a five-year freeze this spring. The Treasury refused to comment if protection against the freeze would be offered.