Pensioners may receive bad news this month, if they find out that they have fallen victim to a tax bill on their protected cash if they have signed up for their employer’s death in service benefits, it has been revealed.

Due to the way some bosses view life insurance, the protected cash could in fact be in violation of tax laws. As a result, investors have been advised to take out their own policy.

A lifetime allowance (LTA) which was introduced by the government this month, set an upper limit on total pension contributions. This system has now been criticised as the money is then heavily taxed.

The good news is, any pension cash accrued before this date and in excess of the LTA could be protected, but there is bad news as regulations stop these savers from making any additional pension contributions.

Many protected pensions are put at risk, because some employers classify death in service benefits as a pension contribution.

“We're seeing a worrying trend for people who have protected their pension pots to fall foul of the rules when joining death in service life insurance schemes,” said David Smith from a consulting group.

Smith furthered that pension savers should be made aware of the problems and risks involved with pension protection and employer benefits.

“It comes as a shock to people to find that they will be facing a potentially huge pension tax bill just because they signed up for life insurance which they could easily have bought themselves outside their employer's pension scheme,” he said.