The number of savers caught out by the pension annual and lifetime allowances jumped in the 2021/22 tax year before the introduction of new pension rules, data from HM Revenue and Customs has shown.
Annual allowance charges, which had been plaguing the public sector and NHS doctors in particular, rose sharply from 43,870 individuals in 2020/21 to 53,330 in 2021/22. As a result, the total value of contributions reached £1.2 billion, up from £814 million the previous year.
The decision by the Chancellor to raise the threshold from £40,000 to £60,000 and increase the minimum tapered annual allowance for high earners should help to “drastically reduce” this figure in years to come and help to relieve some of the pressure from the mounting tax issues doctors were facing, says Quilter head of retirement policy Jon Greer.
Similarly, HMRC’s figures revealed that 11,660 lifetime allowance charges were reported in 2021/22, a steep increase on the 8,820 charges reported in 2020/21.
Greer said: “It is worth bearing in mind that the Lifetime Allowance tax charge was originally only supposed to impact 5,000 individuals yet due to reductions in the lifetime allowance and the freezing of the allowance it was now penalising far more than that each year.
“However, with a general election on the horizon it is anyone’s guess whether the abolition of the lifetime allowance will be a permanent fixture.”
Greer said the abolition of the LTA, while positive for many, does add complexity to the system, particularly around when people can take their tax-free cash.
According to Greer: “The threshold for the maximum amount of tax free cash that can be withdrawn from a pension was frozen in cash terms by the Chancellor at £268,275, so this needs to be considered if your pension pot is at or above the old LTA threshold. Not to mention the risk that the decision to abolish the lifetime allowance could be overturned by future governments.”
Henrietta Grimston, associate director in financial planning at Evelyn Partners, commented: “This all goes to show that, previous to Chancellor Jeremy Hunt’s raising of the annual allowance and effective abolition of the LTA from April 2023, there was a rapid expansion in the number of pension savers falling foul of both these thresholds – quite possibly due to low levels in the take-up of financial advice in these potentially complex areas.”
For those exceeding annual allowance limits, Grimston said it was likely that much of the excess was down to a “lack of either awareness or scrutiny.”
“For those putting increasing amounts aside, perhaps in their later working life, to make up for earlier periods of lower savings, it is easy to lose track of exactly how much is going into a pension in a tax year, especially if it is coming out of gross monthly earnings via PAYE. Hopefully the new more generous limit of £60,000 will make this a more difficult tax trap to fall into.
“However, in a changeable political landscape, it remains to be seen whether this loosening of the Treasury’s approach to pensions taxation persists.”
Pensions contributions
Elsewhere, HMRC’s data showed that individual contributions to pensions edged up slightly in 2021/22. A total of £11.9 billion was paid into personal pensions, marginally above the £11.7 billion recorded in 2020/21. This was largely driven by a rise in individual contributions made by self-employed members which increased from £2 billion to £2.3 billion. Meanwhile, the number of members making individual contributions to a personal pension increased to 7.5 million in 2021/22, up from 7 million the previous year.
Grimston said: “The sharp fall in the number of people contributing to a personal pension from about 9.5million in 2019/20 to 7 million the following year, and then the modest recovery to about 7.5 million in 2021/22, suggests a significant impact of the pandemic on pension saving, through its disruption to work and income for some, and the taking of early retirements for others. The beginning of the cost of living crisis could also have dented pension savings.
“The one bright spot was that the value of contributions from the self-employed actually increased in 2021/22 on the previous year – which might indicate that some of those working for themselves were less likely to retire early, or were more able to adapt to the restrictions imposed during the pandemic and to continue earning and saving.”
Main image: markus-spiske-dMh1A35w_BE-unsplash
