Adviser Points of View (02/04/2019) – Analysis by mutual insurer Royal London claims many of today’s workers are at risk of breaching the £1.03m lifetime limit for pension tax relief over the course of their working life.

The LTA has been cut three times since 2010, and Royal London estimates that around 290,000 workers already have pension rights above the limit and an estimated 1.25 million can expect to breach the LTA by the time they retire.

Interestingly, fewer than half of these workers are thought to have applied for ‘protection’ against past reductions in the LTA and could face big tax bills when they draw their pension.

Steve Webb, director of policy at Royal London, said: “This research shows how the drastic cuts in the LTA mean that large numbers of workers will now be caught by a limit that was originally only designed for the super-rich.

“It is shocking that over a quarter of a million people have already breached the LTA and that many of these are still adding to their pensions. They are likely to get a nasty shock – and a big tax bill – when they do finally draw their pensions. And more than a million further workers who are not currently over the LTA could find themselves in breach unless they take action. This is truly a LTA timebomb.”

Commenting on this issue, Ricky Chan, director and chartered financial planner for IFS Wealth & Pensions, said: “I’m not really surprised that more people are impacted by the LTA, given the significant reductions in the past so it was designed with this in mind. I suspect many of those exceeding the LTA would have some sort of LTA protection, whether Fixed or Individual, in place though so their Lifetime allowance would be higher.

“Also, I think that the LTA is a pretty arbitrary and unfair limit, which penalties thrifty individuals and those who have invested wisely – pensions are simply deferred pay so will be taxed in future anyway so the limit creates a double taxation problem. The LTA penalises those in DC pension schemes more than those in DB schemes due to the way DB incomes are capitalised for LTA calculations.

“We generally find that clients with large DC pensions are mostly aware of the LTA issue as it’s quite straightforward to compare pension fund and the LTA. It gets complicated when you have clients that may have both DC and various DB pensions, including active membership too, as they are likely to be less aware of their LTA position.

“For clients who are making significant pension contributions or are likely to exceed the LTA, we’d of course make them aware of the implications, explore options available to them, including if any protection is available, and do some projections to see if this is likely to be an issue going forward.”

Full article link: https://www.adviserpointsofview.com/2019/04/lifetime-allowance-lta-time-bomb-revealed-by-royal-london/