The tax collected from individuals breaching the Lifetime Allowance (LTA) has increased by 1068% in the last decade, according to analysis of HMRC data by tax experts Mazars.
In the tax year ending 2010/11, HMRC collected £32million from people breaching the Lifetime Allowance, but this has surged to £342million in the tax year ending 2019/20.
The reason behind this large increase in the amount of tax collected is that every year more individuals are being caught by this tax. In the last decade the number of people with pension savings over the LTA threshold has skyrocketed from 890 to 8,510 – an increase of 956%. On average, £40,188 is paid in tax charges by individuals that break the Lifetime Allowance threshold, significantly greater than the average take a decade ago.
This rise has been fuelled by continuous cuts to the maximum amount people are able to save into a pension before facing higher tax charges. The allowance dropped by over 40% to £1,055,000 in 2019/20 and has only seen a small increase for the 2020/21 tax year to £1,073,100.
In the June Budget statement the Chancellor announced that the Lifetime Allowance would be frozen until April 2026 at its current rate of £1,073,100. While a pension pot of a million-plus may sound like a substantial sum of money, the reality is that it might not stretch as a far as some people think.
A 65-year-old retiring with a £1,073,100 pension pot would receive an annual income of £33,3162 based on average life expectancy data and assuming a 25% tax-free lump sum is taken.
Ian Pickford, Partner at Mazars, commented: “Thousands of people have been dragged into paying additional tax on their pension savings in the last decade. With the Lifetime Allowance threshold on ice until 2026, this upward trend won’t slow down, hitting both Defined Benefit (DB) and Defined Contribution (DC) pension savers, especially those with generous pension perks. It’s closer than many people think.
“Freezing the cap is effectively a punishment on saving into a pension, the very thing people are encouraged to do. And the reality is that a £1million pension pot won’t go as far as many believe. Outgoings, like care costs or supporting children or grandchildren, have the potential to swallow up a large chunk of this, even just a short time into later life.
“This is why planning ahead is so crucial. Firstly, to know if you are on track to breach the Lifetime Allowance and secondly, to weigh up the benefits of continuing to contribute to a pension against other ways of saving for later life.
“Increasingly, we are seeing people turn their backs on pensions as a means of income provision in later life, opting to use them as a way to pass down wealth. All the time your money is in a pension, it is growing free of income and CGT and for those lucky enough to have built up other savings, it’s likely a pension will be the last pot to access.”