Around 360,000 savers will face a tax bill equivalent to several years' salary if they bust the new lower lifetime pensions allowance, fresh HM Revenue & Customs estimates show.
Middle earners with generous pension arrangements, including teachers, doctors, policemen, civil servants and managers in the private sector are likely to be affected.
Anyone with a final salary pension of around £60,000 will be caught by the new limit, but worryingly, only 31 per cent of people earning more than £50,000 a year are aware of it, says Standard Life.
Currently, savers are allowed to save up to £1.5 million in pensions before they have to pay 55 per cent punitive tax, but this is being reduced to £1.25m in April next year.
Standard Life warns anyone who fails to protect themselves from the lower ceiling, having already reached the current limit, will face a tax bill upwards of £137,500.
As Investors Chronicle previously reported, some 30,000 pension savers will hit the limit when it is introduced in April 2014. The remainder are on track to exceed it in coming years, the taxman believes.
Alistair Hardie, head of personal consolidation at Standard Life has created a graph to show savers of different ages if their pension pot is big enough to put them at risk of exceeding the lifetime allowance.
It shows that someone with 10 years to go until retirement could be in danger of hitting the lifetime allowance if they have a pension pot bigger than £300,000.
"If you're in the amber zone you need to be checking your pension pot size every year because you could suddenly find yourself very close to the limit if your investments do well. Forgetting about this could be a very expensive mistake - and you can't rely on HMRC or your employer to tell you about it - it's up to you."
If you've got a big pension you can apply for Individual Protection 2014(IP14) to protect it from the lifetime allowance charge. If your fund is worth more than £1.5m you can apply, but IP14 will be capped at £1.5m.
It is possible to protect the growth of your fund, too, on a fund worth up to £1.5m. You can do this by getting Fixed Protection 2014 (FP14), but this prevents you from being able to make any further pension contributions. You'll have to apply for this before April 2014.
Quirks and catches to watch out for
■ Being auto-enrolled into a pension scheme will void fixed and enhanced protection if you haven't already crystallised the assets. If you're one of the tens of thousands of people who took out enhanced protection for your pension fund to avoid exceeding the old lifetime pensions tax limit of £1.8m, or fixed protection against the new cap of £1.5m, and you pay even 1p into a pension scheme, the protection will disappear. Pension providers have been lobbying the government to change the rules on auto-enrolment to protect people with big pots, but to no avail. So, if you start a new job make sure you opt out of the pension scheme within one month.
■ Overseas pensions don't count as part of the lifetime allowance. Thus you can discount any money you might have in a QNUPS or QROPS arrangement when totting up how far away you are from the lifetime limit.
■ Your pension pot is valued at the time of applying for protection and there is no relief available to you if your investments flop and your pot loses value afterwards.
If you've stopped pension contributions
If you find yourself having to give up funding your pension because you’ve reached the lifetime allowance, you will probably start looking for other places to invest your money. Luckily, there is a wide choice of suitable alternative investment vehicles, and tax wrappers to choose from:
Use your spouse’s pension: High net worth individuals should consider contributing to a pension for a spouse or civil partner. This is particularly valuable if your spouse is employed, as you can pay up to the higher of 100 per cent of the spouse’s salary or £3,600 (less any contribution already being made by your spouse). They will receive tax relief on the contribution, and the ‘gift’ will be covered by the spouse exemption for Inheritance Tax.
Maximise tax allowances: Realising capital gains on mutual funds on an annual basis ensures that you maximise the benefit of your annual exempt allowance for Capital Gains Tax (CGT). If this is not used every year then you lose is and it is gone forever.
Utilise gaps in tax wrappers: If you aren’t using up all your tax wrapper limits, redirect money that can no longer be saved in a pension could prove an ideal opportunity to address this. One idea for high risk investors is to use Venture Capital Trusts.
Defer tax offshore: Tax deferred can mean tax saved. If you are a higher rate taxpayer now, it can be tax-efficient to invest through an offshore bond. You will not pay tax until funds are taken from the bond, allowing for planning such as taking gains when paying less tax in retirement, or assigning to a non-taxpayer.
Spread tax exposure: Diversifying your investments across assets that are subject to income tax and those that are primarily subject to capital gains tax puts you in a potentially better position to weather any variations.
