The number of savers caught by annual or lifetime limits on pension tax relief rose sharply between 2020/21 and 2021/22, according to recent data.
HMRC pension data, published this morning (September 27), revealed the total value of annual allowance charges reported by schemes for tax year 2021/22 was £335mn, up from £202mn reported for 2020/21.
There was also an increase in the number of individuals reporting through their tax return that they made pension contributions in excess of the annual allowance and hence triggering a charge.
The number affected went up from 43,870 to 53,330; their excess contributions (on which an AA charge would be levied typically at 40-45 per cent) went up from £814mn to a record £1,213mn.
In Budget 2023, the chancellor raised the annual allowance from £40,000 to £60,000.
Elsewhere, lifetime allowance charges hit £497mn in 2022, compared to £391mn in 2021.
Alice Guy, head of pensions and savings at Interactive Investor, explained: “In a cruel twist, lifetime allowance charges soared last tax year, just before the charges were abolished this April. The rules changes were a complete surprise and many wealthy pensioners will be absolutely gutted to have triggered a 55 per cent penalty, just months before the rules changed."
The figures show why the chancellor felt forced to act in the 2023 Budget, according to Steve Webb, partner at LCP.
"Both annual and lifetime allowance limits have been hitting a wider and wider group of individuals which has added great complexity to the system of pension tax relief and the 2023 Budget changes will therefore make matters a great deal simpler for the widening group that might have been affected," Webb said.
Contributions to pensions
Elsewhere, individual contributions to personal pensions increased by £200mn in 2021/22.
The data showed that £11.9bn of individual contributions were made in 2021 to 2022, an increase on the £11.7bn that was recorded in 2020 to 2021.
A similar increase was also found in contributions made by self-employed pension members who made £2.3bn of individual contributions in 2021 to 2022, a rise from the £2bn in 2020 to 2021.
St James’s Place divisional director of retirement and holistic planning, Claire Trott, pointed out that personal pension contributions have been on the increase since 2016/17.
She added that 2021 to 2022 was “no different” but acknowledged that this most recent increase is “only minimal”.
However, she stated that this is “slightly surprising” given the cost-of-living crisis was impacting individuals, having really started in late 2021.
“We may see more cutting back in the following year due to the pressures increasing over that period,” she added.
Members of personal pension schemes
HMRC’s data also revealed the number of members making individual contributions to a personal pension had increased to 7.5mn in 2021 to 2022 from 7mn in 2020 to 2021.
This increase was attributed to the impact of the Covid-19 pandemic on working, retirement, and contributing behaviours.
Additionally, the data revealed that the number of self-employed individuals making individual contributions to a personal pension had also increased.
Some 340,000 self-employed workers made contributions in 2021/22, a rise from the 330,000 the year before.
Broadstone head of defined contribution workplace savings, Damon Hopkins, commented: “It is great to see an extra half a million savers making contributions to their personal pension.”
However, he warned that it could reflect a “challenging economic time” with older workers entering back into the workforce to top up their savings and reinforcing their financial buffer for later life.
Pensions freedoms
HMRC also revealed the total value of taxable payments withdrawn flexibly from pensions since 2015, when pensions freedoms were introduced, was £72.2bn.
The data added that, in 2022 to 2023, £12.9bn in taxable payments was withdrawn from pensions flexibly.
This represented an increase on the £11.2bn and £9.3bn in 2021 to 2022 and 2020 to 2021 respectively.
HMRC also revealed that between January 1 2023 and March 31 2023, £3.4bn of taxable payments was withdrawn from pensions flexibly by 519,000 individuals across 1.2mn payments.
This represented an 18 per cent increase in the value of payments withdrawn and a 17 per cent increase in the number of individuals withdrawing in Q1 2023 when compared to the same quarter in 2022.
The data additionally reported that the average taxable withdrawal per person was £6,600 in this period.
Canada Life retirement income director, Nick Flynn, commented: “The floodgates have well and truly opened as record amounts are being stripped from pensions.”
While Flynn stated that there is “no need hit the panic button”, he added “I hope these people have a backup plan to be able to generate a wage in retirement”.
“The current cost-of-living crisis may be driving some of this behaviour, and no doubt pent up demand following the pandemic will also be behind these record withdrawals,” Flynn suggested.
“It is important as an industry for us to continue to focus on providing support to ensure people are helped to make the best decisions.”
He added that this includes phased withdrawals to make sure people are as tax efficient as possible.
tom.dunstan@ft.com
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