Anyone who has deferred their defined-benefit pension could unwittingly face a massive tax bill.
The call has been made after pension analysts realised that the move would trigger a tax trap for thousands when the government reduced the lifetime pension limit to £1.25 million in the 2013 Budget.
Essentially, anyone has saved into their pension and who has earned at least £40,000 a year during their career is at risk.
If their defined benefit pension is worth around £20,000 a year and if they have been paying into another pension as well, they could find themselves having pension funds greater than the lifetime limit.
They could now be facing tax bills ranging from several thousand pounds up to seven figures when they retire.
55% tax grab on pensions
Savers need to take action now to avoid the punitive 55% tax grab of their pension pot.
To illustrate the situation: a 40-year-old who is expecting a defined-benefit pension pay out of £20,000 annually would need to only save another £10,000 every year until the age of 65 to exceed the current limit.
Savers should remember that some of the best paying pension investments are returning around 7.5% a year which means that our 40-year-old old saver is looking at a whopping £252,598 tax bill when he retires.
According to HM Revenue and Customs own figures, more than 30,000 taxpayers could have pension assets over the limit when they retire.
One of the issues for savers is that pensions are growing quickly and many do not appreciate the impact this will have on their retirement savings.
Police chiefs over the limit
On top of this, those with defined benefit pensions do not realise that their savings are not growing in line with interest rates but growing with inflation, with many averaging 5% a year growth.
The warning now means that those with a defined-benefit scheme need to be vigilant about fund performance and be careful about how much extra they save.
Those who have left their employer but retained pension rights also need to check their current financial situation as a matter of urgency.
Chris Aitken, a financial planner at Investec Wealth Management, said many savers with a sizeable pension pot which has been unchecked for a few years should steel themselves for the fact it has probably grown by a ‘shocking’ amount.
“Many people from teachers, MPs to senior police officers could all find themselves exceeding the limit,” he said.
