Royal London has urged advisers to see beyond the limits applied to tax relief on pensions as it pointed to the benefits of saving into a scheme even after breaching them.
In a report out today (January 17) entitled 'Why paying a tax charge isn’t always a bad thing', Clare Moffat, head of business development at Royal London Intermediary, said: "It is important that people realise there is nothing inherently wrong in paying one of these charges.
"They aren’t a punishment for bad behaviour; they are simply the mechanisms HMRC uses to claw back any tax relief the member has enjoyed which exceeds annual or lifetime limits."
Ms Moffat warned savers might be selling their benefits package short elsewhere, when trying to avoid paying these charges, an approach that Royal London said had become common.
"Those affected need to be made aware of the potential impact leaving a scheme might have on their long-term retirement planning," said Ms Moffat.
"They could miss out on employer contributions or find they lose valuable death benefits."
The ongoing debate about pension tax resurfaced following a report this week, which revealed many GPs were retiring early to avoid incurring tax charges from breaching the lifetime allowance on pension schemes.
The report suggested Health Secretary Matt Hancock had been in talks with the Treasury to change the lifetime allowance on pensions for GPs to help address retention problems in the sector.
Advisers have long said the government should consider scrapping the lifetime allowance to encourage people to save for their retirement.
Since 2012, the lifetime allowance, the amount a saver can save in a scheme and get tax relief on, has been reduced from £1.8m to £1.03m.
Roger Weeks, director and chartered financial planner at Jacksons Wealth Management in Penzance, said he advised his clients to think carefully about trying to avoid these charges.
"Psychologically, no one likes paying tax," said Mr Weeks. "But it might be doing a different job."
Weeks said the tax charge may come through growth and investment returns on a pension, which could also cover the cost of any incurred payment.
"For some, it might be a horrible pill to swallow, but by leaving a scheme, someone also might be discarding death benefits, for example. They need to look at it in the round," he said.
A spokeswoman for Royal London said the report had not been published in response to the recent debate in the media around the allowances, rather it was part of the insurer’s regular communication with advisers around retirement issues.
The report highlights to advisers the issues they need to consider and processes they can follow to determine whether a client is better off financially by being in or out of their scheme.
It sets out case studies showing typical client scenarios, such as retiring with a lump sum, a defined benefit pension pot or someone receiving a substantial annual bonus.
It highlights both the immediate financial implications for the pension scheme member of exiting their scheme, and how their actions could impact opportunities for further income and inheritance arrangements.
