Over 12,000 investors have notified HM Revenue and Customs they have lost one of the various forms of lifetime allowance protection introduced since ‘A-Day’ in 2006.
Since the pension tax simplification regime came in to force, four separate protection rules have been created as transitional measures to minimise the impact of lifetime allowance cuts – enhanced protection, fixed protection (2012), fixed protection (2014) and fixed protection (2016).
A Freedom of Information request from AJ Bell shows that around 12,000 savers have reported breaching their protections since A-Day.
This can happen for a number of reasons, including where savers voided the terms of their protection when auto-enrolment came into force and failed to opt out of their workplace schemes.
AJ Bell says there has been a notable increase in recorded breaches since auto-enorlment was introduced, with a particular spike since 2017 as more small businesses were bought into the net.
However, breaching any other terms and conditions can also invalidate protection, and result in retrospective tax bills.
AJ Bell senior analyst Tom Selby says: “In a recent first-tier tribunalthe judge decided a man who had accidentally voided his lifetime allowance fixed protection by failing to cancel a contribution standing order should have the protection reinstated.
“If HMRC is unable to get the ruling overturned at appeal, it may mean thousands of pension savers who have had their protection certificate revoked are knocking on its door asking for their money back.”
“Whether it is doctors being hit with tax bills for breaching the annual allowance taper or savers losing fixed protection after contributing to a pension, it’s clear the inherent complexity of the pensions system is causing problems for higher earners.
“The government should review the pension tax regime and consider simpler alternatives which don’t unnecessarily hamper those doing the right thing and saving for retirement.”