Thousands of pension savers have breached lifetime allowance ‘protections’ in the past 12 years, potentially landing themselves with tax bills running into hundreds of thousands of pounds.

That was the conclusion of AJ Bell, who received a response to a Freedom of Information request, which revealed more than 12,000 investors had notified HMRC they had lost one of the various forms of lifetime allowance protection introduced since ‘A-Day’ in 2006.

This was when the modern system of pension tax allowances was introduced as part of a radical simplification programme under Tony Blair’s Labour Government.

Each time the lifetime allowance has been cut since A-Day, a new set of transitional protection rules has been created.

There are four types of protection which can be lost when a member contributes to a pension scheme: enhanced protection, fixed protection (2012), fixed protection (2014) and fixed protection (2016).

Tom Selby, senior analyst at AJ Bell, said: “The lifetime allowance is a pernicious tax which effectively punishes defined contribution savers who enjoy strong investment performance.

“Furthermore, successive cuts to the allowance in recent years have created a complex web of protections designed to protect people close to the lifetime limit from being unfairly penalised.

“A number of these protections come with terms and conditions – namely that you are no longer allowed to contribute to a pension scheme.

“If you do, the protection is lost and you could face a huge tax bill on the excess.

“For example, someone with a £1.25m fund who took out fixed protection 2016 and subsequently lost it in the 2018/19 tax year would face a tax bill of £121,000 on the excess.”

He added: “While we don’t know the exact reasons for all of the protection breaches, around 7,000 have been recorded since the introduction of automatic enrolment.

“We have seen a particular spike since 2017, coinciding with the roll-out of the reforms to smaller businesses.

“It is likely a significant proportion of these people accidentally broke the terms of their protection by failing to opt-out of their workplace scheme, either initially or at their re-enrolment date three years later.

“For these people the massive resulting tax bill will be a bitter pill to swallow.

“However, in a recent First-tier Tribunal ruling the judge decided a man who had accidentally voided his lifetime allowance fixed protection by failing to cancel a contribution standing order should have the protection reinstated.

“If HMRC is unable to get the ruling overturned at appeal, it may mean thousands of pension savers who have had their protection certificate revoked are knocking on its door asking for their money back.”