Pension savers are being warned they could face an avoidable tax bill unless they act now. The Government is reducing the amount you are allowed to save into a pension over your life time from £1.5 million to £1.25 million from the new tax year which starts on April 6, 2014.
But many savers are unaware of how much they have saved for retirement, due to a change in working culture. In the past, workers remained with a single employer for life, making it easy to track their pension savings.
Now, according to Standard Life workers have an average of 11 employers over their work life span, which can make documents considerably harder to collate. If you are unaware that you are approaching or have exceeded the new maximum threshold of the Life Time Allowance, and do so in the new tax year – you could face a hefty tax bill.
Less than fifth of pension savers know that there is a Lifetime Allowance. According to YouGov, this figure drops to just a third for people earning more than £50,000 – the salary bracket most likely to be impacted by the change.
Standard Life has estimated that 360,000 UK employees are potentially affected by the allowance and will be hit by an avoidable tax bill. If they 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 now, they will be able to make the deadline. If you exceed the allowance, you will be liable for a 55% tax bill – which could amount to hundreds of thousands of pounds.
“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,” said Alistair Hardie, head of customer consolidation at Standard Life.
“If they don’t have online access to that information and have many different plans, it may take even longer. They might have to find all the paperwork, request an information pack from each pension scheme provider to work out their cumulative total and then calculate their investment growth and may need advice to see if they are at risk of breaching the allowance.”
Last year the Government set out proposals for a system for the automatic transfer of small pension pots when people change jobs.
For pension savers in defined contribution schemes, it may simplify matters to consolidate your pension funds. But workers in final salary, or other defined benefit schemes – which tend to be of greater financial worth, should consider which scheme will provide a great retirement income before consolidating funds.
