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5 June 2019 last updated

Pension savers threat from lifetime allowance timebomb
Pension savers timebomb
  Two-thirds of pension savers have benefits in excess of the LTA and exposed to a tax charge
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Former pensions minister Sir Steve Webb reveals the lifetime allowance timebomb where 290,000 pension savers could be at risk from a tax charge when they take their benefits.

The lifetime allowance (LTA) was originally a concern for a small minority of pension savers and after the cumulative impact of three significant cuts, some 290,000 people have accrued pensions in excess of the allowance.

The research complied by Sir Steve Webb for Royal London draws on a Wealth and Assets survey from the Government that measures the defined benefit and defined contribution pension wealth of a number of people over time.

This information has been used to to estimate how many are over the lifetime allowance and are currently of working age.

Two-thirds have no fixed protection

The findings of the research by Sir Steve Webb are striking and reveal that only 100,000 people who are still economically active have so far successfully applied for fixed protection locking in a higher level of lifetime allowance.

Taking into account of every person who had ever applied for fixed protection, that would leave two-thirds or 190,000 people at risk of a tax charge.

A significant number of these people are still contribution to their pensions increasing to the tax liability without their knowledge.

In addition to the people already in excess of the lifetime allowance the research projections for the entire working age population how many could exceed the LTA in the future.

Based on their pension savings to date and reasonable assumptions about their future earnings and pension contributions an additional 1.25 million people could be expected to exceed the lifetime allowance if they do not take action to prevent this from happening.

Pension schemes at risk

The largest group of pension savers at risk are for those members of defined benefit pensions.

Even though there has been a decline in the number of defined benefit schemes in the private sector there are more than a million private sector workers are still actively building up final salary rights with around five million public sector workers.

For members with a long service of employment in defined benefit schemes and relatively high final salary there is likely to be significant number of people with a need to take action regarding the lifetime allowance.

The other group with a risk of the LTA are employer defined contribution schemes where the member and employer makes a substantial contribution.

A combination of a long period of relatively well paid employment and good rate of contributions typically from both employee and employer can result in a pension fund in excess of the lifetime allowance.

The typical wages for those at risk are in the £60,000-£90,000 bracket as those with much higher earnings are capped by the tapered annual allowance and unlikely to contribute enough to breach the LTA, according to the research.

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