Aegon has warned about the “hidden risks” for customers who are in danger of falling foul of the lifetime allowance.
The pension provider said those customers within 10 years of retirement who have a pension fund of more than £650,000 should be careful because extra contributions and investment growth could leave them with a hefty tax bill.
The provider also warned those with a defined benefit pension approaching the £50,000 mark could break the lifetime allowance if they transfer their savings to access the pension freedoms.
In April, the lifetime allowance will drop to £1m from £1.25m, which was announced by chancellor George Osborne in his Budget last year.
Figures from Aegon show what amount today would reach the lifetime allowance by simply growing in line with inflation, even if no further contributions are paid.
In the table, the left hand column indicates how many years the client is away from reaching retirement age:
| LTA £1m | 4% growth | 5% growth | 6% growth |
| -2yrs | £924,556 | £907,029 | £889,996 |
| -4yrs | £889,338 | £855,940 | £824,098 |
| -6yrs | £855,462 | £807,728 | £763,072 |
| -8yrs | £822,876 | £762,231 | £706,568 |
| -10yrs | £791,531 | £719,297 | £654,248 |
Steven Cameron, regulatory strategy director at Aegon, said: “It is not just those who have already got a pension fund of over £1m that need to think about the new lower lifetime allowance.
He argued there is a much bigger group who need to check if ongoing contributions and future investment growth could put them into a position where they will suffer a tax penalty.
“However, for most people, exceeding the lifetime allowance is probably a ‘nice problem to have’ and we wouldn’t want individuals to stop contributing unnecessarily or worse still turn down a valuable employer contribution.”
Aegon also identified a new risk for those in DB schemes who might be planning to access the new pension freedoms.
In a defined benefit scheme, the yearly allowance is £50,000, which the provider argued is significantly more than what £1m would buy you as a regular income from a defined contribution scheme.
“This is good news for those taking their pension from their DB scheme,” Mr Cameron said, pointing out however that DB schemes don’t offer the freedom to take an amount as variable income or a lump sum from age 55.
Savers who are keen to access these freedoms would need to transfer across to a defined contribution scheme, for which there is a regulatory requirement to seek professional advice first.
Those individuals close to retirement age with a defined benefit pension of just under £50,000 could be offered a transfer value that exceeds £1m, which Mr Cameron said is “good news”, but not so good for those clients exceeding £1m who wish to take money out of their pot.
“This shows just how complicated the implications of the lifetime allowance are and how important it is to seek professional advice,” he said.
“We would urge the chancellor to reconsider if these complications can be swept aside to coincide with a move to a new system of tax relief, expected to be announced in the Budget.”
The chancellor is also expected to announce the introduction of a single rate of tax relief in his next Budget.
Ray Best, managing director at Unavida Life Planning, said the warning is absolutely right, adding that in fact anyone with a pension over £500,000 within 10 years of retirement should be careful.
“We are making clients aware that there are a variety of strategies they can use, but it’s not good for advisers like myself to be encouraged to use pensions in a creative way, to suddenly say they are not such a good strategy after all.”
He advised that clients should be taking protection measures to protect their lifetime allowance.
Mr Best also expressed his concern that the chancellor might impose further restrictions on the lifetime allowance. “It’s a huge risk for clients and we are worried he is drip-feeding the news out.”
“We are very concerned that pensions are being used a political football.”
Alex Reynolds, IFA at Advies Private Clients, said he would have thought the warning should be aimed at those savers who are more than 10 years from retirement, or those with £750,000 and above who are within 10 years of retirement.
“From our persective with clients we identify those we feel are going to get to that target within a reasonable period of time.
“It’s certainly where clients need a lot of advice, but it doesn’t help when the rules keep changing.
“People need to make sure they understand where their pension position is as they get older because they are the ones that will have an imminent task on their hands to do something about it.”
katherine.denham@ft.com