More than a million workers could be hit with shocking pension bills by a tax originally designed for the super-rich, analysis by an insurer suggests.
Royal London found that a quarter of a million people have breached the £1.03 million Lifetime Allowance (LTA) limit, while more than a million people are likely to before they retire.
This leaves them exposed to a 55 per cent tax on anything above the limit, which has been almost halved since 2010 from £1.8million.
More than a million workers including head teachers, senior council workers and senior NHS staff could be hit by the shock tax bill
The Lifetime Allowance (LTA) limit has been dropped to £1.03million leaving more than a million people at risk of breaching it and being charged 55 per cent tax on anything above the limit
People receiving a good wage and a relatively generous pension are likely to be affected, said Sir Steve Webb, a former pensions minister who is now director of policy at Royal London.
‘Senior public servants such as head teachers, senior officers in the local council, senior civil servants, as well as senior NHS staff and police officers are likely to be affected,’ he said.
‘The other set of people are those working in the private sector with a good wage, so earning £60,000 to £90,000 a year.’
‘This research shows, for the first time, how the drastic cuts in the Lifetime Allowance 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.
Senior NHS staff could also be affected by the tax originally designed for the super-rich
‘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 Lifetime Allowance time bomb.’
The analysis used data from the Wealth and Assets Survey to project people’s pension wealth by the time they reach retirement.
The Royal London analysis calculated how many current workers are at risk of breaching the £1.03 million lifetime limit for pension tax relief over the course of their working life – as well as the numbers who are already over the limit.
Some 83 per cent of those already thought to be over the LTA are men, but, in the years to come, women are increasingly likely to find themselves going over the limit, the research suggests.
A third (33 per cent) of those projected to go over the LTA are women, while just 17 per cent of those calculated to be already over it are female.
The research suggests the LTA will ‘bite’ more severely over time, dragging in hundreds of thousands of workers who would not necessarily regard themselves as being rich.
Royal London’s report said that in 2010, when the LTA peaked at £1.8 million, it represented around 80 times the national average wage.
Royal London carried out the research using data from the Wealth and Assets Survey to project people’s pension wealth by the time they reach retirement
But it is now worth slightly under 40 times the average wage.
‘This means that the LTA is, in effect, twice as tough as it was at the start of this decade,’ the report said.
Royal London estimates that, across Britain, around 290,000 workers already have pension rights above the limit – with people aged in their late 50s and early 60s and being particularly likely to fall into this category.
Less than half of them are thought to have applied for protection against past reductions in the LTA, which would reduce their chances of facing a tax charge, and so could face big tax bills when they draw their pension, Royal London said.
And nearly half of those already over the LTA are continuing to add to their pension wealth – potentially storing up an even bigger tax charge with every passing year – the research found.
In addition to those already over the limit, an estimated 1.25 million people who are yet to retire can expect to breach the LTA by the time they do so, the research suggests.
Royal London said available data suggests that only a couple of thousand people exceeded the LTA in 2016/17 – a fraction of the numbers who could breach the limit in the years to come.
The report found one reason why so many people are expected to exceed the LTA is that it tends to increase in line with price inflation – but money invested in pension pots will often grow faster than this over the long-term.
The research assumed that LTA limits would continue to increase in line with inflation.
But it said: ‘If the LTA were to be cut in real terms in the future, this would mean that the estimates in this paper of the number of people of working age at risk of being caught by the LTA would need to be increased.’
A Treasury spokesman said: ‘We want people to save into a pension, which is why we allow the majority of savers to make contributions tax-free.
‘But we do have to get the balance right between encouraging saving and managing government finances, which is why we restrict tax relief available for the highest earners.
‘Less than 1 per cent of pension savers – largely those with the highest earnings – face an annual allowance charge as a result of this policy.’