That is according to Steve Webb, director of policy at Royal London, who submitted the request for information.
The FOI reply, supplied to Royal London, showed that more than 100,000 people have secured ‘Fixed Protection’ against past cuts in the Lifetime Allowance for tax relief purposes.
But this protection could be invalidated if they see an increase in their pension rights following a recent court case.
In December 2018, in a case brought by Lloyds Bank employees, the High Court ruled that pension funds needed to make changes to eliminate inequalities between men and women brought about by the rules around Guaranteed Minimum Pensions (GMPs).
In many cases this could mean relatively modest changes to the amount of pension which people will receive.
But even a tiny change could invalidate someone’s longstanding protection against past cuts in limits on pension tax relief, landing them with a huge tax bill.
When the Lifetime Allowance (LTA) for pension tax relief was cut from £1.8m to £1.5m, then £1.25m and then £1m, those who already had high levels of pension saving were allowed to ‘lock in’ those higher limits by schemes known as ‘Individual Protection’ and ‘Fixed Protection’.
But one of the conditions for Fixed Protection is that the taxpayer does not accrue any further benefits in future.
According to Royal London, there is a risk that the process of GMP equalisation – which could, for example, slightly increase someone’s pension at retirement - would count as an accrual which would invalidate the protection.
If someone’s tax relief limit suddenly fell from £1.8m to the current £1.03m, they could face a 55% tax charge on the difference – a bill of £423,500.
Royal London says there is evidence that the Government is aware of this problem but has not yet taken action.
Mr Webb said: “This issue combines two of the more complex areas of pensions – GMPs and pension tax relief limits.
“But that combination could result in a catastrophic tax bill for someone who had acted entirely in good faith.
“It would be absurd and perverse if a small and unrequested pension boost in response to a court judgment meant that a scheme member suddenly faced a huge tax bill.
“It is not good enough for HMRC and DWP to be discussing this issue and thinking about issuing guidance.
“Taxpayers need to know where they stand as a matter of urgency.”