Pension savers could face tax bills for thousands of pounds by joining employee benefit schemes.
David Bates, head of wealth management at Bartlett Group, has warned that anyone who joins a group death in service scheme or workplace ‘auto-enrolment’ pension could forfeit their application for fixed protection of their lifetime allowance.
The lifetime allowance is the total amount of money you can hold within your pension fund(s) for retirement without incurring additional tax penalties.
The government reduced the allowance from £1.25 million to £1 million from 6 April this year but savers can apply for ‘fixed protection’, which allows them to keep the higher amount.
Fixed protection is lost if any additional money is paid in.
David said: “I would urge savers to check their employee benefits very carefully as they could unknowingly make a contribution that results in the loss of protection and a substantial tax bill.
“Many people don’t realise that joining a group death in service scheme counts as a pension contribution. This is a quirk that could catch a lot of people out, especially higher earners who change jobs.”
Death in service schemes provide a tax-free lump sum to a beneficiary in the event that an individual dies while employed. Payments can typically be up to four times the individual’s salary.
David added: “When a chief executive or indeed any high earner moves from one company to another, they may automatically be enrolled into the pension scheme, potentially putting their lifetime allowance protection in jeopardy. Unless they opt out within 30 days they will be deemed to have made a pension contribution.
“In addition, every three years, employers have a duty to automatically enrol those who have opted out. Individuals need to be aware of when this will happen and opt out within one month to avoid losing their protection.”