The Lifetime Allowance (LTA) is a limit on the amount of pension benefits that can be taken – whether lump sums or retirement income – without triggering an extra tax charge.
Now, after being frozen in the Budget at £1,073,100 until April 2026, more savers are in danger of falling into the trap.
They would then face a 55 per cent hit if the excess is taken as a lump sum or 25 per cent if taken as income, for example as a scheme pension, an annuity or drawdown. Income tax at your marginal rate will also be payable.
The Pensions Advisory Service cautions: “If the value of your pension savings exceeds the LTA by £100,000, and you want to take this as a lump sum, then you will pay £55,000 tax. If the value of your pension savings exceeds the LTA by £100,000, and you want to use the excess to purchase an income, then you will pay a £25,000 tax charge.”
The PAS goes on: “As pensions are normally a long term commitment, what might appear modest today could exceed the lifetime allowance by the time you want to take your benefits. It may be necessary to take your pension early or stop contributing to the scheme/plan, even though you have not retired, to avoid your benefits exceeding the lifetime allowance.”
Once standing at the level of £1.8 million, figures from HM Revenue & Customs show the LTA tax take increasing by around 2,000 per cent in the decade from 2006/07 to 2016/17, rising from £5 million to more than £102 million.
The Office for Budget Responsibility predicts the new freeze will raise £1 billion over the next five years in addition to the savings in handing out tax relief where people have made the decision to stop contributing in an attempt to try and manage their fund value in line with the cut-off.
Critics say the LTA is effectively a tax on growth.
Had the Chancellor not intervened, it is estimated it would have edged ahead by £5,800 this tax year, reaching just under £1.2 million in 2025-26.
Pensions and Lifetime Savings Association (PLSA) director of policy and advocacy Nigel Peaple commented: “Given the pressure on the public finances it is not surprising that the Government has chosen to freeze the lifetime allowance.
“From the Treasury’s perspective, it will raise about £300 million per year by 2025-26. About 90 per cent of savers will be unaffected so most people can go on saving in their workplace pension without worrying about the rule change. However, the freeze will affect about 10 per cent of savers, usually those on higher salaries with a lot of pension savings, such as senior doctors.”
Mark Pemberthy, head of DC & Wealth at Buck, added: “The freeze will affect relatively few people in the short term and will be an uncontroversial way to help begin tackling the UK’s debt in the eyes of most of the public. However, if the freeze continues then over time it will have a bigger impact, particularly on those who are building up defined benefit pensions.
“Long-serving public sector workers earning higher levels of income are most likely to be caught, including doctors. So, the very same doctors who have spent the last year battling Covid in NHS hospitals will also be among those people most vulnerable to this policy change over time.”
And it may not be the end of controversial pension tinkering if, as many expect, the Government abolishes or dilutes the ability for higher-rate taxpayers earning £50,001 to £150,000 to claim 40 per cent pension tax relief.