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Lifetime allowance tax take continues to grow as individuals ‘penalised’

10 May 2018

The annual amount of tax collected from people exceeding the lifetime allowance has soared by 1000% in 10 years, a freedom of information request by Retirement Advantage has revealed.

The arbitrary tax penalises individuals who have enjoyed good returns on their investments, the retirement specialist said.

In 2006/07, the annual tax take was less than £10m, but that figure was at £110m in the 2016/17 tax year.

The figures show that most of the increase has taken place since 2012, when the government started cutting the lifetime allowance.

The lifetime allowance was first introduced as part of pension simplification in 2006, and reached a high of £1.8m before being reduced back down to its current £1.03m limit.

Retirement Advantage described the annual tax take figures as “just the start”, with the number of people affected expected to grow substantially as more people with sizeable assets start to draw an income.

The data also showed a sharp rise in the number of people applying for protection, from 8,000 when the lifetime allowance was first introduced to 61,000 people in the 2016/17 tax year.

Andrew Tully, pensions technical director, Retirement Advantage, commented: “The numbers paint a stark picture of how the lifetime allowance has impacted savers. There is an obvious link to make between the increase in tax take and the slashing of the lifetime allowance over the last six tax years.

Tully said there was a “significant disparity” in the way benefits are measured against the lifetime allowance, depending on whether the person has a defined benefit or defined contribution pension scheme.

He added: “With a relatively low cap on contributions to pensions of £40,000 a year, and less for higher earners, there is an argument the lifetime allowance should be scrapped. The number of individuals applying for Protection has gone through the roof in the 2016/17 tax year, which is to be expected as this was when the lifetime allowance fell from £1.25m to £1m, with two protection options available to those who thought they may be affected.

“Another contributing factor may be the significant increase in the numbers of people transferring benefits from a final salary scheme, who are looking to protect benefits they have built up. The lifetime allowance is a complicated area of pension planning and it is all too easy to get caught out.”

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