Pension savers caught by lifetime allowance rule change

Pension savers caught by lifetime allowance rule change

Tax paid to the Exchequer by pension savers who have exceeded their lifetime allowance has increased by 80 per cent following a tightening of the rules.

The tax take has climbed to £36m last year up from £20m in 2014/15, according to a Freedom of Information request by Salisbury House Wealth.

Over the last five years the tax imposed on exceeding the lifetime allowance has climbed from £12m in 2012/13 to £19m in 2013/14, £20m in 2014/15 and £36m in 2015/16.

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The lifetime allowance (LTA) represents the maximum amount of money a saver can save in their pension pot - and benefit from tax relief at their marginal rate - before incurring an additional tax charge of up to 55 per cent.

The LTA was reduced to £1m in April 2016 and is expected to increase from 2018 onwards in line with consumer prices.

Tim Holmes, managing director of Salisbury House Wealth, said: “An increasing number of taxpayers who have done the responsible thing and saved for retirement are being caught out by this super tax trap.

“Many of these individuals are not particularly high earners.”

“The reduction of the LTA to £1m in 2016 has seen a huge surge in the number of people being hit by the tax. Often this is totally unexpected – and can be incredibly damaging to retirement plans.”

David Fairs, pensions partner at KMPG and former chair of the Association of Consulting Actuaries, said at £1m, the lifetime allowance is relatively low.

"Someone amassing £300,000 of pension savings by age 35 could find themselves hitting the lifetime allowance by age 65 without making a single contribution beyond age 35, so individuals might have to stop making contributions a long way before retirement and before they think that they have built up reasonable retirement savings.”

He added: “Given the lifetime allowance has jumped around so much, it is hard for the high earner to know if they are aiming for the right target.  Is the government likely to further, and unexpectedly, increase or decrease the lifetime allowance from the current figure?  How do you plan savings over a 40-50 year period when the government changes the rules so often?”

Tom McPhail, head of policy, Hargreaves Lansdown, said he expects to see the impact of allowance cuts feeding through into substantially higher tax charges over the next few years.

"The pensions industry has got to come up with an alternative pension tax model if it wants to put a stop to this death by a thousand cuts.”

Karen Goldschmidt, actuary and partner at Lane Clark & Peacock, said the focus has to be on how to get the best benefit outcome net of tax, not on minimising the amount of tax.  

"For example, if you can still earn some defined benefit pension but it would attract lifetime allowance tax, the outcome may still be a valuable benefit worth having, even if a bit less valuable than would otherwise have been the case.