The tax paid by individuals who have breached the lifetime allowance (LTA) has soared by 1,000% since it was introduced in 2006.
Figures obtained by Retirement Advantage earlier this year highlighted that £110 million in tax was obtained from savers who exceeded the LTA during 2016/17, compared with less than £10 million in 2006/7 when the allowance was introduced.
Financial education business Wealth at Work has said the rise in those breaching the LTA can be attributed to three key reasons.
They are Blissfully unaware of their position
The first reason people exceed the LTA is they simply do not think they are likely to have a pension pot valued at £1.03 million, the current LTA limit, or more.
Wealth at Work explained this could affect those who do not check the value of their pension or have not done so for some time.
Also, many defined benefit (DB) scheme members are unaware that their pension is valued at 20 times their annual pension for LTA purposes. DB members looking to transfer into a defined contribution (DC) arrangement can also be unaware their transfer value can also result in a breach of the LTA.
People think they are much further away than they think
Other people may believe they are far from breaching the LTA when they have actually reached or exceeded it. This can be the case where employees are making higher than minimum contributions, have received a pay rise or are receiving matching contributions into their scheme.
It can also be the case when their investments perform better than expected. This was one argument made by MPs in a recent report calling for the LTA to be scrapped.
People think they have protection when they do not
Wealth at Work also said some employees may think they have taken protection measures and opted out of their workplace pension to safeguard their savings from an LTA charge.
However, under auto-enrolment rules, employers are required to re-enrol employees every three years. This could invalidate protection measures, even if only one payment is made.
What to do?
One of the best ways to avoid being stung by these charges is to take advice from a financial advisor who specialises in these cases. Should you wish to manage your own LTA pension accounts you may want to consider some coaching in the form of Capital Wealth Partners Lifetime Allowance Coach as found here