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New pension statistics show annual allowance and lifetime allowance charges are soaring, says Quilter’s Browne

Money jar with pension written on

Following on from HMRC’s personal and stakeholder pension statistics, Ian Browne, pensions expert at Quilter, comments:

“There are lots of good news stories to be taken from the recent pension figures coming out of HMRC this morning. First is that a huge £31.3bn was contributed to personal pensions in 2019 to 2020 up 12% on the previous year. This really shows that pre-pandemic the public was starting to understand the need to start prioritising saving for retirement as the state pension alone is unlikely to come anywhere close to providing the kind of retirement lifestyle many aspire to. However, what these figures will look like post pandemic is yet to be seen and as we now as we enter a cost-of-living crisis people may understandably prioritise money in their pocket today over ploughing money into their pension.

Similarly, although the positive impact of auto-enrolment does seem to be plateauing, it achieved a significant spike in the number of people contributing to a personal pension over the past few years. There has been no year on year increase with around 9.4 million people contributing in 2019 to 2020, but this is up by a huge 1.2 million people from 2012/13.

Annual and Lifetime Allowance charges

However, the bad news is that the figures also show that our highly complex tax system is catching an increasing number of people out as annual allowance and lifetime allowance charges begin to soar. This is likely to get even more pronounced in future data sets due to the various frozen allowances announced at the last budget..

Annual allowance charges, which have been plaguing the public sector and NHS doctors in particular, causing doctors to reduce their hours is spiking. In 2019 to 2020, 42,350 taxpayers reported pension contributions exceeding their AA through Self-Assessment. The total value of contributions reported as exceeding the AA was £949 million in 2019 to 2020 which has increased from £819 million in 2018 to 2019.

Similarly, in 2019 to 2020, 8,510 LTA charges were reported with a total value of £342 million. This is a 21% increase from £283 million in 2018 to 2019. It is worth bearing in mind that the Lifetime Allowance tax charge was originally only supposed to impact 5,000 individuals yet is now penalising far more than that each year. The Lifetime Allowance is now a problem for affluent people as well as those who could be considered high net worth.

The government should be doing everything it can at present to encourage savers to put money away for their retirement. While auto-enrolment has been a very successful step in the right direction, it’s important that the highly complex rules around the annual allowance and lifetime allowance don’t hamper the good work the policy has done. These rules require an intricate knowledge of the UK’s pension landscape to understand and therefore time and time again catch people out.

With the right advice and with the right holistic retirement plan, the effect of the Lifetime Allowance charge can be mitigated. Either avoiding the charge, deferring part of the charge or potentially reducing it can do this and which route will depend on the individual circumstances of the person. However, this is a complicated area of the pensions landscape and without professional financial advice someone could be facing a 55% immediate tax charge on the excess.

Flexible payments from pensions

Also included in the data is the most recent set of flexible payments from pensions statistics. The most recent data set shows that there was an eyewatering one million payments per quarter at the back end of 2021. Although in 2021, there was an increase in the number of people accessing their pension any fears that we would see significant spikes in pension access never materialised. Although the number of payments and total value has risen, it is nothing out of the ordinary and clearly the government support schemes did their job and prevented a mass exodus of savings and what was taken out seemed to peak in Q2. However, we are now facing a very different beast as energy bills and food are set to soar and pensioners may well feel that they need more each month to get by. While the state pension will rise with inflation going forward and help offset some of the costs it will be far from enough for people to rely on. As such, future statistics are likely to show more people raiding their pensions to pay for their spiralling bills as we enter a fiscally difficult time.”

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