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LTA protection breached 12,000 times in 12 years

Over 12,000 pension savers have breached lifetime allowance protections in the past 12 years, potentially incurring tax bills running into hundreds of thousands of pounds

LTA protection breached 12,000 times in 12 years

Over 12,000 pension savers face heavy tax bills after breaching lifetime allowance (LTA) protections over the past 12 years. 

A freedom of information (FOI) request submitted by AJ Bell revealed over 12,000 investors have notified HM Revenue & Customs (HMRC) they have lost one of the various forms of LTA protection introduced since 'A-Day' in 2006.

Every time the LTA has been cut since A-Day, a new set of transitional protection rules has been created. The four types of protection that can be lost when a member contributes to a pension scheme are enhanced protection and three iterations of fixed protection, introduced in 2012, 2014 and 2016 respectively.

AJ Bell senior analyst Tom Selby said: 'The LTA is a pernicious tax that effectively punishes defined contribution savers who enjoy strong investment performance.

'Furthermore, successive cuts to the allowance in recent years have created a complex web of protections designed to protect people close to the lifetime limit from being unfairly penalised.

'A number of these protections come with terms and conditions – namely that you are no longer allowed to contribute to a pension scheme. If you do, the protection is lost and you could face a huge tax bill on the excess.'

Selby also highlighted that someone with a £1.25 million fund who took out fixed protection 2016 and subsequently lost it in the 2018/19 tax year would face a tax bill of £121,000 on the excess.

Around 7,000 of the breaches have been recorded since the introduction of auto-enrolment, with a particular spike since 2017 coinciding with the roll-out of smaller business reforms. 

'It is likely a significant proportion of these people accidentally broke the terms of their protection by failing to opt out of their workplace scheme, either initially or at their re-enrolment date three years later. For these people, the massive resulting tax bill will be a bitter pill to swallow,' Selby (pictured above) said. 

'However, in a recent First-tier Tribunal ruling the judge decided a man who had accidentally voided his LTA fixed protection by failing to cancel a contribution standing order should have the protection reinstated.

'If HMRC is unable to get the ruling overturned at appeal, it may mean thousands of pension savers who have had their protection certificate revoked are knocking on its door asking for their money back.' 

Solutions

Selby called for the government to review the pension tax regime and consider simpler alternatives which do not 'unnecessarily hamper those doing the right thing and saving for retirement. 

He added: 'One option would be to create separate tax regimes, with defined benefit schemes controlled by a LTA and defined contribution by a single annual allowance. This would allow the Treasury to keep a lid on costs and in the process remove huge complexity from the system.

'The annual allowance taper and money purchase annual allowance could then be scrapped altogether, radically simplifying the system in the process.'

Read more:

Tax Doctor: How to save LTA protection after divorce

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