Many professionals are unaware that they may find themselves facing a large tax bill when it comes to drawing their pension.
Middle class workers in professions such as management, head teachers and doctors could unknowingly be saving too much in their pension pots.
Financial advisors are concerned that not enough professionals are aware of the recent changes to the limit on pension savings and could be in for a nasty shock when they choose to retire. They are doing their best to save money for a decent and comfortable retirement, but if they save too much they could be gifting the taxman a large chunk of their nest egg.
From next April, the cap on pension savings will be reduced from the current £1.25 million to £1 million. Any amount over this will incur punitive tax charges at 55%.
Since 2011 there has been several cuts to the lifetime allowance a person can save in their pension fund, going from a high of £1.8 million to £1 million next year.
The latest cut is said to raise around £1.9 billion for the treasury will affect around 72,000 pension savers until 2017.
Whilst many can only dream of having a pension pot worth more than £1million, many middle-class professionals, particularly those who work in the public sector and have paid into generous final salary pensions, could find the fall foul of the tax man unless they act quickly.
It is estimated that those earning more than £74,000 a year could find themselves in a position where they may be saving too much into their pension fund.
Many people with final salary pensions are unsure of the size of their pot, compared to those who have a defined contributions pension which builds up a pot of cash that can easily be tracked.
Final salary pensions are calculated on the salary that a person retires on, along with years of service. It is slightly more complicated to work out how much a pot will be worth, they would need to find out how much their pot was worth by consulting with their employers and then times that amount by 20 to see if they will breach the cap on pension savings.
If a person has more than one pension pot then this further compounds the complications as they will need to contact each pension provider for information.
Whilst the situation is more likely to affect those with final salary pensions, those with defined contributions pensions could also be at risk if they tend to save a lot of money into their funds and the pensions performed well.
To counter any discouragement from younger pension savers, the Government has promised to increase the £1 million threshold in line with inflation every year.
However, if pension savers act quickly they may be able to apply for special protection to safeguard against the punitive tax.
Anyone who currently has a pension pot worth between £1 and £1.25 million or those who will surpass the £1million threshold in the next two years will be able to apply for protection against the 55% tax and keep the £1.25 million threshold in place.
Those who won’t be able to apply for the extension will need to be savvier about checking their pension balance and reduce their savings accordingly. Savers over the age of 55 will be able to draw down their 25% tax-free lump sum to reduce the size of their pension to avoid any taxes if there pot exceeds the cap.