HM Revenue & Customs is warning 7,500 people that they risk losing enhanced protection on their pension pot if they do not opt out of automatic enrolment.
People who applied for enhanced protection before A-Day, 6 April 2006, are protected from high tax charges if their fund is valued at more than the lifetime allowance when they start drawing their pension.
Investors who completed applications for fixed protection before 6 April this year were able to keep the old lifetime allowance of £1.8m. On 6 April, the allowance was cut to £1.5m.
These protections will be lost if any additional contributions are paid into a pension scheme. If this happens, any pension savings above the lifetime allowance would be taxed at 55 per cent.
A warning about the risk of losing fixed protection due to auto-enrolment was included in HMRC’s fixed protection application documents, recently sent to investors.
An HMRC spokesman says: “HMRC has written to enhanced protection customers to advise them of the consequences of automatic enrolment and the actions they may need to take.
“Anyone with enhanced or fixed protection who is automatically enrolled by their employer will lose this protection unless they opt-out of the pension scheme within one month.
“If you opt out within that one-month period then the law treats you as if you were never a member of the pension scheme. In these circumstances you will keep your enhanced or fixed protection.”
AJ Bell technical resources manager Gareth James says: “It is encouraging that HMRC has taken the initiative in issuing letters to people holding protection.”
Forty Two Wealth Management partner Alan Dick says: “Losing your enhanced or fixed protection as a result of auto-enrolment is a real risk and the consequences could be significant.”