Pension lifetime allowance

Pension Lifetime Allowance tax take jumps by over 1,000%

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HMRC data shows that tax collected from individuals breaching the Lifetime Allowance for pension savings has increased by 1068%. In the tax year ending 2009/10, HMRC collected just £32m from people breaching the limit, with this jumping to £342m in the tax year ending 2019/20 (provisional figures at the time of writing). On average, individuals that exceeded the threshold in 2019/20 paid £40,188 in tax charges. The study also found that the number of people with pension savings over the Lifetime Allowance threshold has increased by over 950% -  from 890 to 8,510 – over the same ten year period.

Number and value of Lifetime Allowance charges by the scheme through the accounting for tax return (AFT)

The issue is also likely to further exacerbate. In the March 2020 Budget Rishi Sunak announced that the lifetime allowance (LTA), which governs how much can be saved in a pension before tax charges apply, would remain at its current level of £1.073m until 2025/26. This was a reversal of policy introduced a few years earlier where the LTA was due to increase in line with inflation.

The LTA is a very important pensions consideration. It effectively sets the maximum tax efficient value of all your retirement benefits, assuming you have not already applied for any of the protections that are available. If your accumulated pension benefits exceed the LTA there is a tax charge which is 25% if the excess is drawn as taxable income and 55% if it is received as a lump sum.

When the LTA was first introduced in 2006, it was set at £1.5 million, a level which equated to an annual pension income of £75,000. The initial legislation set out increases for the LTA to £1.8 million in 2010/11. That proved to be the LTA’s highwater mark. It was frozen in the following year and then the first of three cuts were introduced. By 2016/17 the LTA was down to £1 million.

The freezing of the Lifetime Allowance has three consequences:

  • The total pension protected from the Lifetime Allowance tax charge has fallen. Currently for someone in a defined benefit (final salary) scheme, due to the way the calculation works, it is £53,655. For defined contribution pension arrangements, such as personal pensions, the erosion is greater. Low annuity rates mean that £1,073,100 will buy an inflation proofed income of just over £30,005 a year (before tax) for a 65-year-old on a single life basis with a guaranteed period of 5 years increasing in line with inflation.
  • The legislative protections, some of which date back to 2006, are now all the more valuable as they provide protection in some cases much greater than the current LTA.

For those people who have planned well, or been fortunate enough, to accumulate significant pensions funds, its important they continue to plan well, including seeking financial advice, to help the plan in respect of the LTA.

At Armstrong Watson our quest is to help our clients achieve prosperity, a secure future and peace of mind. If you think you may need to consider how you could more effectively plan in relation to  the Pension Lifetime Allowance you could benefit from personalised financial advice.  

We can provide a full review of your pension arrangements, with our compliments in the first instance, to help you to understand your position, and any financial planning opportunities in relation to this, based on your individual circumstances and arrangements.


If you would like more information, get in touch with Simon by email simon.mayoh@armstrongwatson.co.uk or call 01132 211392.

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