More than a million workers risk being hit by a ticking pensions "time bomb" – potentially leaving some with shock tax bills blowing a hole in their retirement plans, analysis from a mutual insurer suggests.
Royal London used existing data to project the impact of the Lifetime Allowance (LTA) on today's working age population.
It calculated how many current workers are at risk of breaching the £1.03 million lifetime limit for pension tax relief over the course of their working life – as well as the numbers who are already over the limit.
Those who exceed the LTA could face a tax charge of up to 55% of their pension savings above this level.
More than a quarter of a million people are already over the limit, but some may not know it, and more than a million others could be over the limit by the time they retire, it found.
Some 83% of those already thought to be over the LTA are men, but, in the years to come, women are increasingly likely to find themselves going over the limit, the research suggests.
A third (33%) of those projected to go over the LTA are women, compared with 17% of those calculated as being already over it being female.
The research suggests the LTA will "bite" more severely over time, dragging in hundreds of thousands of workers who would not necessarily regard themselves as being rich.
Dream retirement destinations
Dream retirement destinations
A study by MGM Advantage discovered that Portugal is the 10th most popular dream retirement destination among Brits.
You get the attractions of the sun, a more relaxed way of life, lower living costs and cheaper property. You can also benefit from pension arrangements that mean your pension rises with inflation.
And if you choose to, you can spend your time with the enormous expat population, feeling like you never left.
In the tradition of the Best Exotic Marigold Hotel, there’s a large number of people keen to move to India, partly in order to enjoy a much higher standard of living than they would be able to afford in the UK.
If course it’s important to consider that your state pension will not rise in line with inflation - so will halve in real terms during your retirement.
This part of Europe offers a great combination of some of the lowest living and housing costs on the continent, along with a more forgiving climate than the UK.
For that reason Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Greece and Turkey are a big draw for retirees.
However, state pension provision varies across the region, so you will need to check whether retiring to these locations will mean your pension continues to rise in line with increases in the UK, or will be frozen when you move overseas.
Italy is a country of contrasts, so anyone planing a retirement there needs to think carefully about whether they want to call a bustling city home, or whether they would be happiest in the mountains or by the sea.
Housing tends to cost less than in the UK, and in some regions it's incredibly cheap. Living costs are also lower than in Britain, and your pension will rise in line with increases in the UK.
Canada is a big draw for British expats of all ages. This spectacular country is known for being welcoming to people from all over the world, and in many cases has no language barrier for Brits. The quality of life is high, and the cost of housing lower than in the UK.
However, you will need to factor in the fact that your UK state pension will be frozen on the day you leave, and you will need some health insurance if you want to replicate the sorts of things that are available for free on the NHS.
As with India, the Far East offers an exciting and dramatic change from life in the UK, with much lower costs, which can buy you a higher standard of living (although bear in mind your state pension will be frozen).
You will need to consider the cultural and practical differences associated with the move, but you will have the opportunity to live in one of the most exciting places in the world.
The weather, lifestyle, space, and lower cost of living means that British expats of all ages are keen to move to Australia.
Property can be a bit of a stumbling block in some areas, as prices have gone up so much. The currency is also strong, which has posed some issues for those who receive their income in pounds, and there’s the fact that the UK state pension will be frozen if you move. However, if you can overcome these things, then a new life in the sun awaits.
The US offers much more affordable housing, and in many respects a lower cost of living than in the UK.
It appeals to those who don’t want to live with a language barrier, but want more space, possibly more sun, and an American Dream of their own.
There are some important things to factor in before you move, such as the additional cost of healthcare, and the exchange rate. However, one bonus is that your state pension will rise at the same rate it does in the UK.
France is close to home, and yet offers cheaper accommodation than the UK, a lower cost of living, and in many regions there’s better weather too.
Your pension will rise at the same rate it would in the UK, and at any time friends and family are just a short boat or plane ride away. It’s no wonder France is the second most popular dream destination for retirees.
It will come as little surprise that Spain tops the list - largely because it’s already the most common overseas retirement destination for Brits.
Millions of us have experienced the delights of the sun, sea, and the lower cost of living while we were on holiday in the country, so it’s hardly a shock that so many want to experience it on a full-time basis in retirement.
Huge falls in the price of property has made this a cheap place to buy, and the fact that your state pension will keep pace with rises in the UK means you’ll be able to maintain your standard of living throughout your retirement.
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Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said: "This research shows, for the first time, how the drastic cuts in the Lifetime Allowance mean that large numbers of workers will now be caught by a limit that was originally only designed for the super-rich.
"It is shocking that over a quarter of a million people have already breached the LTA and that many of these are still adding to their pensions.
"They are likely to get a nasty shock – and a big tax bill – when they do finally draw their pensions.
"And more than a million further workers who are not currently over the LTA could find themselves in breach unless they take action.
"This is truly a Lifetime Allowance time bomb."
The LTA has been cut three times since 2010.
Royal London's report said that in 2010, when the LTA peaked at £1.8 million, it represented around 80 times the national average wage.
But it now worth slightly under 40 times the average wage.
"This means that the LTA is, in effect, twice as tough as it was at the start of this decade," the report said.
The analysis used data from the Wealth and Assets Survey to project people's pension wealth by the time they reach retirement.
Royal London estimates that, across Britain, around 290,000 workers already have pension rights above the limit – with people aged in their late 50s and early 60s and being particularly likely to fall into this category.
Less than half of them are thought to have applied for protection against past reductions in the LTA, which would reduce their chances of facing a tax charge, and so could face big tax bills when they draw their pension, Royal London said.
And nearly half of those already over the LTA are continuing to add to their pension wealth – potentially storing up an even bigger tax charge with every passing year – the research found.
In addition to those already over the limit, an estimated 1.25 million people who are yet to retire can expect to breach the LTA by the time they do so, the research suggests.
Within this, there are two main groups of people likely to breach the limit.
These are senior public sector workers who have built up "gold-plated" salary-related pensions over long careers and relatively-well paid workers in defined contribution (DC) pensions earning around £60,000 to £90,000 per year whose employers make generous contributions into their pension pot.
Royal London said available data suggests that only a couple of thousand people exceeded the LTA in 2016/17 – a fraction of the numbers who could breach the limit in the years to come.
The report found one reason why so many people are expected to exceed the LTA is that it tends to increase in line with price inflation – but money invested in pension pots will often grow faster than this over the long-term.
Seven retirement nightmares
Seven retirement nightmares
Figures from charity Age UK show that 29% of those over 60 feel uncertain or negative about their current financial situation - with millions facing poverty and hardship. Even though saving for retirement is not much fun, the message is therefore that having to rely on dwindling state benefits in retirement is even less so. To avoid ending up in this situation, adviser Hargreaves Lansdown recommends saving a proportion of your salary equal to half your age at the time of starting a pension. In other words, if you are 30 when you start a pension, you should put in 15% throughout your working life. If you start at 24, saving 12% of your salary a year should produce a similar return.
Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.
Around 427,000 households in the over-70 age groups are either three months behind with a debt repayment or subject to some form of debt action such as insolvency, according to the Consumer Credit Counselling Service (CCCS).
Its figures also show that those aged 60 or older who came to the CCCS for help last year owed an average of £22,330. Whether you are retired or not, the best way to tackle debt problems is head on.
Free counselling services from the likes of CCCS and Citizens Advice can help with budgeting and dealing with creditors.
Importantly, they can also conduct a welfare benefits check to make sure you are receiving the pension credit, housing and council tax benefits, attendance and disability living allowances you are entitled to.
The average UK pensioner household faces a £111,400 tax bill in retirement as increasing longevity means pensioners are living on average up to 19 years past the age of 65, according to figures from MetLife. And every year in retirement adds an extra £5,864 in direct and indirect taxes based on current tax rates to the costs for the average pensioner household. You can be forced to go bankrupt if you fail to pay your taxes, so it is vital to factor these costs into your retirement planning.It is also important to check that you are receiving all the benefits and tax breaks you are entitled to if you want to make the most of your retirement cash.
The cost of a room in a care home in many parts of the country is now over £30,000 a year, according to figures from Prestige Nursing and Care. So even if the prime minister announces a cap on care costs - last year the economist Andrew Dilnot called for a new system of funding which would mean that no one would pay more than £35,000 for lifetime care - families will still face huge accommodation costs. Ways to cut this cost include opting for home care rather than a care home. Jonathan Bruce, managing director of Prestige Nursing and Care, said: "For older people who may need care in the shorter term, home care is an option which allows people to maintain their independence for longer while living in their own home and should be included in the cap." However, the only other answer is to save more while you can.
Older Britons are often targeted by unscrupulous criminals - especially if they have a bit of money put away. For example, many over 50s were victims of the so-called courier scam that tricked into keying their pin numbers into their phones and handing their cards to "couriers" who visited their homes. It parted consumers from £1.5 million in under two years. Detective Chief Inspector Paul Barnard, head of the bank sponsored dedicated cheque and plastic crime unit (DCPCU), said: "Many of us feel confident that we can spot fraudsters, but this type of crime can be sophisticated and could happen to anyone." The same is true of boiler room scams that target wealthier Britons with money to invest, offering "once-in-a-lifetime" opportunities to snap up shares at bargain prices. Tactics to watch out for include cold calling, putting you under pressure to pay up or lose the opportunity for good, and claiming to have insider information that they are prepared to share with you.
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The research assumed that LTA limits would continue to increase in line with inflation.
But it said: "If the LTA were to be cut in real terms in the future, this would mean that the estimates in this paper of the number of people of working age at risk of being caught by the LTA would need to be increased."
A Treasury spokesman said: "We want people to save into a pension, which is why we allow the majority of savers to make contributions tax-free.
"But we do have to get the balance right between encouraging saving and managing government finances, which is why we restrict tax relief available for the highest earners.
"Less than 1% of pension savers – largely those with the highest earnings – face an annual allowance charge as a result of this policy."