Staff should avoid exceeding lifetime allowance

Employers should ensure that high-earning employees are not tempted to make pension contributions that will take them above the lifetime allowance limit.

Doing so, could result in high tax penalties for staff and mean that they miss out on pension contributions from their employer, warns consultancy Watson Wyatt.

The lifetime allowance, which was introduced in April last year, currently allows people to invest up to the equivalent of £1.5m into their pension over a lifetime. If they exceed this amount, they will be taxed at a rate of 55% on the excess.

Mick Calvert, head of executive financial planning at Watson Wyatt, said: "I’ve seen numerous situations where employees have been tempted into putting bonus money into a pension plan close to the lifetime allowance resulting in them needing to leave their employer’s pension scheme because continued membership would take them over the lifetime allowance.

"My fear is that some people – particularly those with bonuses that they are looking to invest – are being encouraged by commission-hungry financial salespeople, highlighting only the initial tax-advantages, to put the monies into an individual pension arrangement, but this can backfire badly."

Calvert recommended that pension holders should leave a decent margin below the lifetime allowance until they are a year or two away from retirement.