Thousands of pension savers must act now to avoid hefty tax bill

13th January 2014

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Hundreds of thousands of pension savers are potentially walking into a massive tax bill courtesy of HMRC unless they act fast and get their house in order by the end of February.

According to insurer Standard Life, some 360,000 may fall foul of the so-called pensions lifetime allowance (LTA), which drops to £1.25m on 6 April this year.

The LTA applies to an individual’s total pension worth, so they will have to act quickly to gather details of current values and growth projections for any private pensions, including SIPPs, as well as any workplace money purchase or defined benefit schemes.

If they haven’t tracked down all the information they need by the end of February, they run a real risk of missing the decision deadline.

Calculations by Standard Life show that due to investment growth, an individual 10 years from retirement with accumulative pension savings of around £700,000 or a final salary pension income of around £60,000 could be at risk of breaching the £1.25m LTA.

Pension savers who do not check to see if they will be affected and who exceed the LTA 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.

Pension savers who might be affected by the drop in LTA will need to gather current values from all of their pension providers – and that can take time. If they don’t have online access to that information and have many different plans, it may take even longer.

Research by YouGov, on behalf of Standard Life, shows less than a fifth (19%) of people know what the LTA is and only 31% of people earning more than £50,000 – the salary earners most likely to be impacted by the change – are aware of it.

Alistair Hardie, head of customer consolidation at Standard Life, says: “It might take somebody weeks, if not months, to gather all the documentation required to work out their total pension value, particularly if they have many different pots. Pensions savers who might be affected need to make sure they don’t miss any of their pensions out and need to start things moving now.”

Research for the DWP shows that an individual will work for an average 11 employers during their lifetime, which means some people are likely to have accumulated many different pensions over the course of their careers, making it more difficult to get a clear view of their overall pension fund value.

The Government’s long term plan is for most pension pots to be consolidated as people move from job to job, but it may be some time before this is implemented and it is not certain that it will include pension pots accumulated to date.

Hardie adds: “If people think they might be impacted, they should seek advice soon, well ahead of the April deadline to find out what the best next steps for them could be. Options could be individual or fixed protection or to continue to save and take a tax charge.

“We would recommend people aim for the end of February to have collated all their necessary details and to have arranged a meeting with their financial adviser. Leaving it any later could result in them unfortunately slipping past the 6th April deadline. And when you take into consideration the tax year end is one of the busiest times for advisers, getting started on this early is a must.”

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