More than a million UK workers could end up paying charge for exceeding pension lifetime allowance
The pensions lifetime allowance (LTA), first introduced in 2006, stood at GBP1.8 million in 2010. It was reduced to GBP1.5 million in April 2012, to GBP1.25 million in 2013, and again to GBP1 million in April 2016. It is now GBP1.03 million, having been increased along with inflation since 2016. That sum will buy an annual pension of about GBP25,000.
Individuals with pension funds above this level must pay a 55 per cent tax charge on their 'excessive' savings. Transitional protection from this charge was granted to people whose pension pots already exceeded the new limits when they were introduced, but only if they were applied for. In any case, they are becoming less relevant as time goes on and more people build up their pension pots in the approach to retirement.
The Royal Life study found that almost 300,000 workers already have pension rights above the GBP1.03 million limit. Another 1.25 million are at risk of breaching it by the time they retire, said Royal Life's director of policy Steve Webb, formerly a pensions minister himself. Under half of these taxpayers are believed to have applied for transitional protection, and so could be facing a large tax charge when they retire. Many of them are still paying contributions into their pensions, storing up an even bigger tax charge with every passing year, he added.
The two main groups likely to breach the LTA are senior public sector workers with long service in defined benefit pension schemes; and workers earning GBP60,000-90,000 a year in a defined contribution pension arrangement, where their employer makes a generous contribution into their pension pot. The very highest earners are probably less affected, because the amount they can put in to a pension each year is now heavily limited.
At the moment, the number of those charged is small, with only 2,410 people having to pay in 2016-2017, although the amount raised by these charges was substantial, at GBP110 million. However, the numbers of people exceeding the LTA are set to grow rapidly, partly because the allowance is only being increased in line with price inflation, while wages of well-paid people are likely to grow faster and so will the money they save in their pension pots.
'This means that the LTA will bite progressively more severely over time and will drag in hundreds of thousands of workers who would not regard themselves as rich', said Webb. 'The number likely to face a tax charge could increase more than a hundredfold, caught by a limit that was originally only designed for the super-rich.'
Webb described the LTA as a 'time bomb', and said many workers have little idea that it is a problem. 'Individuals need to take expert advice if they are to avoid potentially huge tax bills', he said.
Royal London's research is based on analysis of data on more than 7,700 workers.
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