The total tax paid by those exceeding their lifetime pension allowance amounted to £36 million in 2015/16, climbing steeply from £20 million in 2014/15 and equating to an 80% rise. The figure has climbed in recent years from £12 million in 2012/13 to £19 million in 2013/14 and up again to £20 million in the following year. The increased revenue has been generated through more stringent rules introduced last year regarding the lifetime allowance (LTA), which puts a limit on the size that an individual’s pension fund can grow to without incurring additional tax charges.
The LTA was reduced from £1.25 million to £1 million in the 2016/17 tax year, with no amendment to this lower level until April 2018 when it is set to increase in line with consumer prices from then onwards. This means that any pension savings above £1 million are currently subject to an additional 55% tax charge if accessed this year. The reduced LTA is being seen by many as a ‘tax trap’ as individuals who have responsibly saved for their retirement, many of whom are not on especially high salaries, are now being caught out for doing so. For many, the tax charge has been entirely unexpected and could potentially have a major impact on their plans to retire.
The reduced LTA of £1 million has also been described by many in the pensions sector as relatively low thanks to the effect of cumulative investment growth. For example, a 35-year-old with a pensionable salary of £35,000 and a total pension investment of 10% per month, who has already saved £150,000 towards their pension, would find themselves breaching the current lifetime allowance at their State Pension Age of 68 if they were to get a 5% per annum investment return. As a result, some people may consider stopping making pension contributions earlier than planned, many years before reaching retirement age.
A further problem highlighted is that the recent reduction is just the latest in a long line of alterations to the LTA, which has changed eight times since it was introduced as part of the Labour government’s pension simplification policy in 2006. With the LTA having shifted so much in recent years it has become very difficult for individuals to know what size pension fund they should be targeting.
To protect savers from the recent falls in the LTA, the government has made various forms of ‘LTA protection’ available which can be used to mitigate the potential for any future lifetime allowance tax charges.
If you believe that you may be affected by the Lifetime Allowance now, or in the future, then please contact your Creative Financial Planning Consultant, or get in touch with us at firstname.lastname@example.org.
Note – The value of an investment may go down as well as up and you may not get back what you initially invested