While originally aimed at the wealthy more than two million are in the firing line. The point at which it kicks in has been frozen for five years, catching more every year.
Pension savers are being punished for the crime of working hard to fund a comfortable retirement and avoid being a burden on the state.
Yet that is exactly what the government has been urging everyone to do for decades.
Woe betide those who are deemed too successful. They will end up handing over more than half of their surplus savings to HM Revenue & Customs, and the number caught is set to grow during the five-year freeze.
The pensions lifetime allowance, or LTA, caps the maximum you can save across all your company and personal pension schemes at an arbitrary level.
Those whose total pension savings climb above the LTA will hand over a staggering 55 percent of the surplus to HMRC.
The lifetime allowance stood at a whopping £1.8 million a decade ago, which meant that only the wealthy got caught.
It has been repeatedly slashed to today’s level of £1,073,100, while being eroded by inflation, too. When Rishi Sunak was Chancellor, he froze it at that level for five years, until the 2025/26 tax year.
Rob Morgan, chief investment analyst at Charles Stanley, said pension savers need to watch their step.
The pension lifetime allowance is applied every time you access your pension from age 55. It will also be applied on your 75th birthday, whether you are taking any benefits or not.
Any money above the allowance is charged at 55 percent if taken as a lump sum.
If you take the money any other way, for example through pension payments or regular cash withdrawals, it is taxed at 25 percent but with income tax slapped on top.
Higher-rate 40 percent taxpayers still end up handing over around 55 percent of the pension to HMRC, although basic rate taxpayers will pay a lower amount.
Morgan said many unwittingly fall into the trap and Sunak’s five-year freeze increases the dangers. “Investors will have to be more vigilant than ever or they may accidentally stray above the threshold as they grow their pension pots.”
If they do, HMRC will swoop.
The pensions lifetime allowance applies to defined benefit final salary workplace schemes, personal pensions and any other pension that has paid you a lump sum or income.
It does not apply to the state pension.