12,000 savers facing huge tax bills from lifetime allowance protection breaches

Thousands of pension savers have breached lifetime allowance ‘protections’ in the past 12 years, potentially landing themselves with tax bills running into hundreds of thousands of pounds.

An AJ Bell Freedom of Information request revealed over 12,000 investors have notified HMRC they have lost one of the various forms of lifetime allowance protection introduced since ‘A-Day’ in 2006.

AJ Bell senior analyst Tom Selby commented: “The lifetime allowance is a pernicious tax which 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.

“For example, someone with a £1.25m 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.”

A spike in protection breaches of around 7,000 have been recorded since the introduction of auto-enrolment.

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