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Government rakes in £110m in pension Lifetime Allowance tax

Written by: Paloma Kubiak
There has been a 40% increase in the number of people falling foul of the pension Lifetime Allowance in the 2016/17 tax year, after it was cut in April 2016.

The Lifetime Allowance (LTA) is the maximum amount of pension savings you can build up without a tax charge.

The tax charge for exceeding the LTA is different depending on how the income is taken: 55% if taken as a lump sum or 25% if it is taken as income.

In April 2016, the allowance was cut from £1.25m to £1m and figures reveal an extra 40% of people have since come under the scope of the tax charge for exceeding the limit.

The figures, obtained by Old Mutual Wealth, revealed that in 2016/17, the government collected £110m from 2,410 people who went over the Lifetime Allowance. This was an increase from the 1,610 people caught by the rules in 2015/16, paying £80m in tax.

In the last 10 years, the allowance has moved between £1.8m to £1m now (it will rise to £1,03m in April, the first increase since 2006) and Old Mutual said there has been a 1,047% increase in the number of people impacted by the LTA – from 210 in 2006/07 to 2,410 in 2016/17.

Further, it means a 2,100% increase for the government coffers.


Many believe the LTA is a tax on the rich, but as the figures show, breaching the LTA is a very real possibility for substantial parts of the population, according to Old Mutual.

It said a 35-year-old earning £57,000 per year with total pension contributions, including employer contributions, equalling 15% of their salary, would mean they will end up over the LTA by the time they are 70. Equally, it is also a risk for those with defined benefit schemes, such as public sector workers.

Ian Browne, pension specialist at Old Mutual Wealth, said: “On the outset a Lifetime Allowance of at least £1m seems completely reasonable. Once they hear such a large figure people are likely to tune out, convinced it will have nothing to do with them.  This underestimates the power of compounding interest, investment, tax-free growth and continual pension contributions.

“As a long-term investment, what might seem like a modest amount, could exceed the allowance by the time you start to withdraw. People should not mistake that the LTA is just a concern for the top 1%. In fact, the allowance would need to go up to over £4.5m if it were just to impact the top percent of the population.”

Plan ahead

Browne said it is important for people to plan ahead to ensure they make the most out of pensions, without having to pay higher tax.

He said people should make use of other allowances such as the Capital Gains Tax allowance, the dividend allowance and maxing out ISAs.

“Once you have maximised your other allowances, offshore bonds will help you continue to save in a tax efficient environment. Together these all form part of your overall retirement plan. It’s also worth remembering that your spouse or partner will also have a Lifetime Allowance and so it may be worth investing in their pension rather than your own.

“It’s also worth considering if you want to fund your pension to pass it on to a love one. You can nominate a beneficiary through an expression of wish form and this person can draw amounts of your pension. Even if the amount is in excess of LTA, it will be more tax efficient than paying inheritance tax. Plus the amounts from your pension do not contribute to your beneficiaries’ lifetime allowance.”

For those who are already approaching the LTA they should check if they are eligible for fixed or individual protection 2016.

“Individual protection is only for those who had savings of at least £1m in April 2016, when the allowance was lowered from £1.25m to £1m. The protection allows savers to retain the lower of your pension value at April 2016 or £1.25m. There is no minimum pension value required for fixed protection, which also allows you to keep the £1.25m allowance. But making any new pension contributions after April 5 2016 voids the protection and your allowance will go back to £1m,” Browne explained.

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