Pension savers need to act now to avoid painful tax penalties, says Continuum.

by | Sep 21, 2022

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Upcoming annual data from HMRC is likely to show a continued increase in the number of pension savers breaching their Lifetime Allowance. Pension savers need to act now if they are to avoid painful tax penalties, according to national IFA firm Continuum.

Figures from HMRC showed that 8,500 people went past their Lifetime Allowance in the 2019/20 financial year, a 21% increase from 2018/19. It is a trend that looks set to continue when the figures are released for the 2020/21 tax year next month.

The Lifetime Allowance currently stands at £1,073,100 and has been frozen until the 2025/26 tax year. Go past the limit, and you could find yourself facing a tax charge as the taxman claws back the contribution he has made to your pension savings.

For example, if your pension pot totals £1,300,000 the excess is £226,900. This is taxed at either 55% (if you take it as a lump sum) or 25% if you take it any other way.


£1,073,100 sounds a great deal of money, but if you spend a few decades saving into a pension plan at something close to the annual allowance of £40,000 together with the potential growth from a well-managed investment plan, it is possible to build up that kind of pot.

Stephanie McClarence, Chartered Financial Planner at Continuum, said: “Most people I talk to about their pensions are focused on whether or not they’re putting enough into their plans, and rightly so, but few are aware that having ‘too much’ could leave them with another tax bill.”

“The lifetime allowance tax charge can be a difficult one to manage because even if you stop adding money into your pension once you’re nearing your limit, a few good years of investment performance could push you past your allowance”


“The good news is, it can also be paid directly from your pension arrangements and the tax is only payable on the portion of funds over your lifetime allowance and only when you either pass away, reach age 75, or draw on these excess funds.”

“In the past the lifetime allowance has been higher than it is now, each time the government has reduced this threshold they’ve offered the opportunity for individuals to protect their pension against the reduction, if certain criteria are met. There are a couple of these protections still available to individuals, however, the legislation around these schemes is complicated, using the schemes is not for the faint hearted, and getting expert advice to take advantage of these schemes is essential.”

Having too much money is a problem most of us don’t expect to have but growing numbers of people are doing exactly that by having too much built up in their pension pot.


Martin Brown, Managing Partner at Continuum, added: “You may need to change your pension plans – in most cases you will not be able to put more into your pension pot. You will probably have to look at your other investments, which may not be as tax efficient.

“A good independent financial adviser can help you look at your existing pension plans and help determine if you are in any danger of going past your Lifetime Allowance. They can help you understand the protection schemes and see which are most appropriate for you.”

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