APRIL 2021


Register with PP

Newsletter, Jobs & Event Alerts


Lifetime and annual allowance breaches increasing

29 September 2019

The need for sound financial planning around the pensions lifetime allowance has been further highlighted by the latest data  published by HM Revenue & Customs. These show that the number of people in breach of the allowance limit increased sharply in the 2017/18 tax year, up 36% from the year before.  

HMRC figures revealed that 4,500 individuals exceeded the lifetime allowance in 2017/18, paying a total tax charge of £185 million. This number had risen from 3,350 individuals a year earlier and significantly above the 760 individuals who paid £13m in 2006/07.

The lifetime allowance is currently pegged at £1.055m, down from a peak of £1.8 million in 2012.

Andrew Tully, technical director at Canada Life, said the numbers paint a “stark picture” of how the lifetime allowance has impacted savers.

He said: “There is an obvious link to make between the increase in the tax receipts and the slashing of the lifetime allowance since 2012. It seems clear the government’s tax take from the lifetime allowance will continue to grow substantially over the coming years.

“The lifetime allowance is an arbitrary tax which penalises individuals who have enjoyed good returns on their investments. There is also a significant disparity in the way benefits are measured against the lifetime allowance depending on whether the individual is a member of a defined benefit or defined contribution scheme.”

With a cap on contributions to pensions of £40,000 a year and less for higher earners, Tully said scrapping the lifetime allowance would “massively simplify” pensions for schemes, providers and customers by removing the complexity around areas such as benefit crystallization events.

Meanwhile, the number of people hit by pension tax charges as a result of exceeding the Annual Allowance, the limit on money that may be paid into a pension per year, also grew significantly in 2017/18, with the tax take from those breaching the £40,000 annual limit hitting £812m.

Data from HM Revenue & Customs showed that 26,550 individuals reported breaching the annual allowance in their self-assessment tax return, amounting to an average contribution of £30,584 per person. In the previous 2015/16 tax year, the number of people caught by the penalty was significantly lower at 18,500, resulting in a total fine of £578m.

There are two ways in which individuals pay the tax charge; either through a self-assessment tax return or via a scheme where the individual asks the pension scheme to pay the charge on their behalf.

The total value of annual allowance charges paid by schemes was £173m in 2017/18.

Those affected by the annual allowance has shot up over 11,000% in the past decade, with just 230 affected by the tax charge in 2006/07, compared to over 26,000 people in the 2017/18 tax year.

Jon Greer, Quilter head of retirement policy, commented: “This dramatic shift means that it is now relatively normal for people to face limits on the amount they can save with tax relief and penalties for exceeding that.

“It places real pressure on people trying to plan their finances and discourages individuals from setting money aside for the future.

“It is especially problematic for those with variable earnings or bonuses, who may save at a rate through the year which they expect to be under the annual allowance but then find their plans are thrown off course as their earnings change.”

HM Revenue & Customs does not provide a breakdown as to how much was raised as a result of breaching the standard annual allowance, and how much was down to the tapered annual allowance or money purchase annual allowance.

However, the sharp increase in the number of individuals in breach of the allowance in the last few years has led experts to blame the introduction of the tapered annual allowance in 2016.

Tully said: “The annual allowance tax take has increased massively, especially since the introduction of the tapered annual allowance from April 2016. Even something which sounds as simple as an annual allowance is complicated by the fact we have three different limits – a standard allowance, a very low allowance for those who have flexibly accessed their benefits, and a fiendishly complicated position which reduces the limit for higher earners. This complexity means many individuals may be unintentionally caught by the allowance.”

Tom Selby, senior analyst at AJ Bell, echoed the sentiment: “The culprits behind this spike in pension tax are almost certainly the taper and the money purchase annual allowance. The lifetime allowance also continues to hit ever larger swathes of people.

“As we approach an inevitable general election, political parties of all persuasions need to reflect on the anti-savings message being given to the British public by these measures. The MPAA and the lifetime allowance just add to this complexity, while constant tinkering gives the impression of a moving feast which many struggle to have confidence in.

“With the taper in particular placing huge strain on the NHS, scrapping this measure should be a priority for the Government. We continue to bang the drum for an independent review of the entire pension tax framework, with a focus on simplifying and encouraging more people to save for retirement.”

Royal London pension specialist Helen Morrissey warned: “This is just the beginning and we will see more and more people being caught out by this overly complex regime as time goes on.”


Professional Paraplanner