Over 100,000 pension savers could find themselves landed with a six-figure tax bill out of the blue, following modest uplifts to their pension.

The shocking figure has been revealed following a request for information by former pensions minister Sir Steve Webb (now with Royal London) under the Freedom of Information

Royal London believes that while the Government is aware of the situation, it has so far failed to do anything about it.

The FOI reply showed that 100,000 savers have secured “Fixed Protection” against past cuts in the Lifetime Allowance for tax relief purposes. This protection, it now appears, could be invalidated if they receive an increase in their pension rights following a recent court case.

In a case brought by Lloyds Bank employees, the High Court ruled at the end of last year that pension funds were obliged to implement changes to eliminate inequalities between men and women resulting from the rules around Guaranteed Minimum Pensions (GMP). 

While this – in many cases – will lead to relatively minor changes to the pension a person will receive, it could invalidate their longstanding protection against past cuts in the limits on pension tax relief.

When the Lifetime Allowance for pension tax relief was reduced (in stages down from £1.8m to £1m, now £1.03m) those with high levels of pension savings already in place were allowed to lock in those higher limits through schemes known as Individual Protection and Fixed Protection. 

However, a condition for those enjoying Fixed Protection is that they cannot accrue further benefits into the future. If GMP equalisation leads to someone enjoying an increase in their pension at retirement – even if it is a tiny amount – it would count as an accrual and invalidate their Fixed Protection… potentially reducing their tax relief at a stroke.   

Should someone’s tax relief limit drop from £1.8m to the current £1.03m, they could face a massive 55% tax charge on the difference.

Mr Webb said: “This issue combines two of the more complex areas of pensions – GMPs and pension tax relief limits. But that combination could result in a catastrophic tax bill for someone who had acted entirely in good faith. 

“It would be absurd and perverse if a small and unrequested pension boost in response to a court judgment meant that a scheme member suddenly faced a huge tax bill. 

“It is not good enough for HMRC and DWP to be discussing this issue and thinking about issuing guidance.  

“Taxpayers need to know where they stand as a matter of urgency.”

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