Savers warned of tax bills as LTA protection take-up wanes

Savers warned of tax bills as LTA protection take-up wanes

The number of people protecting themselves against breaching the lifetime allowance is slowing, leaving savers exposed to unnecessary tax bills, LCP has warned.

Data from HM Revenue and Customs shows more than 325,000 people have registered for protection against the lifetime allowance since its inception in 2006 but only about 4,000 people did so in the most recent year. 

LCP warned some people who are able to benefit could face unnecessary tax bills as a result of this.

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The consultancy also warned this issue was likely to become more important following the government's implementation of a five-year freeze in the value of the LTA at its current level of £1,073,100.

Steve Webb, partner at LCP said: “Limits on pension tax relief have been cut repeatedly in recent years and savers who planned on the basis of much higher limits can find themselves on course for large tax bills when they start to draw their pensions.  

“Anyone whose pensions already exceed the lifetime allowance or who thinks that they might to do so in future should check to see if applying to HMRC for protection would be to their benefit”.

Each time the LTA is cut, the government offers people the chance to protect themselves against it with fixed or individual protection.

For example, in April 2016 the LTA was cut from £1.25m to £1m, which could have caused problems for those who had already built up pots above £1m or who were on course to do so.  

Fixed protection 2016 allowed people to lock in the old LTA of £1.25m but under the condition that no further pension contributions can be made.

Individual protection 2016 is for those who already had pensions valued at over £1m when the LTA was cut.

This allows them to lock in a personalised LTA set at whatever their pensions were worth at the time. People are also able to save into a pension without losing this protection.

Individual and fixed protection were also allowed in 2014 when the LTA was cut from £1.5m to £1.25m, and fixed protection was allowed in 2012 when the LTA was cut from £1.8m to £1.5m.

More than 27,500 people have so far opted for individual protection 2016, whilst over 44,800 have locked in fixed protection 2016.  

People can also apply for LTA protection for someone after they have died, potentially saving a tax bill on the estate.

Due to the complexity of protections, LCP said it was normally a good idea to take financial advice when considering applying.

Tim Morris, adviser at Russell & Co said: "I register clients who I anticipate will likely exceed their LTA protection in future. I know several advisers who also take this ‘belt & buckle’ approach. 

"My view is you may as well apply for it while available, even if it’s lost later. 

"Seeing as 2016 was the last time a new form protection was introduced, let’s hope it’s not a case of out of sight, out of mind for other advisers and non advised pension members.