"Individuals may have a number of pension schemes that when combined with their current pension provision, could exceed the allowance."
Wealth at Work, a specialist provider of financial education and guidance in the workplace supported by regulated advice for individuals, believes that individuals who breach the LTA typically fall into one of the following three categories - the blissfully unaware, those who think they are a long way off, and those who think they are protected but aren’t.
The blissfully unaware
It is quite possible that the value of someone’s pot is far higher than they realise and that they may have already breached the allowance. This could particularly affect those who never check the value of their pension, or haven’t done so for some time. Also, many individuals in defined benefit pension schemes are unaware that their pension is valued at twenty times their annual pension for LTA purposes and so an annual pension of £30,000 has a value of £600,000.
If a member of a DB pension scheme decides to transfer their pension into a defined contribution scheme to take advantage of the pension freedoms, the transfer values offered can be much higher than the standard method of working out the LTA value. For example, transfer values can be as high as forty times the annual pension, so using the above example, an annual pension of £30,000 could have a transfer value of £1.2m and therefore exceed the LTA.
Those who think they are a long way off
This is particularly the case where individuals are making healthy contributions into their pension and perhaps receiving valuable matching contributions from their employer. Positive pension fund growth as well as a pay rise may easily push someone over the LTA before they know it.
For example, if someone aged 45 has a pension fund of £400,000 and a salary of £50,000, saves 5% of their salary into their pension which rises by 3% p.a and receives employer contributions of 10%, rising by 3% p.a., it is possible for their pension fund to reach £1,670,000 by the time they retire at 65. By this time the LTA is expected to be valued at £1,690,000, showing they are not that far from breaching the limit.
Those who think they are protected but aren’t
This group of individuals could unknowingly breach the LTA because of the way in which auto-enrolment works.
For example, employees who have taken protection measures and opted out of their workplace pension scheme to safeguard their savings from a LTA charge could still be at risk of a breach. This is because employers are required to re-enrol employees every three years and may do so without their knowledge.
Responsible employers will inform employees whom they plan to re-enrol, so that they’re aware that pension contributions will be deducted from their monthly pay, but it is not a legal requirement for them to do so. Just one month’s contributions could invalidate a previously applied for protection, without someone even realising.
Jonathan Watts-Lay, director for Wealth at Work, commented: “Reaching the LTA could be closer than many think. For example, individuals may have a number of pension schemes that when combined with their current pension provision, could exceed the allowance.
"The tax implications could be drastic with many potentially being hit with an unexpected and sometimes unnecessary tax bill."
