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HMRC rakes in £126m from ‘diligent’ pension savers

Paloma Kubiak
Written By:
Paloma Kubiak
Posted:
Updated:
19/09/2016

Pension savers forked out nearly £126m in tax for breaching the £1.25m lifetime allowance in 2015/16, figures from HM Revenue & Customs (HMRC) reveal.

This is up 62% from the previous tax year when HMRC collected £78m in revenue.

The lifetime allowance (LTA) is the maximum amount of pension savings you can build up without incurring a tax charge. The figure currently stands at £1m having been cut from £1.25m in April 2016. It has previously been as high as £1.8m.

Savers who exceed the allowance are charged either 25% tax on the excess if they withdraw the money as income, or 55% if it is withdrawn as a cash lump sum.

The figures, obtained through a Freedom of Information request, revealed that 1,090 individuals were taxed at 25%, netting HMRC £71m in tax revenue, while 449 savers were charged at a rate of 55%, meaning they paid £55m in tax on their pension savings.

Since the 2011/12 tax year, the total tax paid on breaching LTA has tripled from £47m.

‘Insidious tax’ that discourages pension savers

The reduction in the LTA has left more middle earners at risk of receiving an unexpected tax bill.

Andrew Pennie, head of pathways at Intelligent Pensions, said: “The lifetime allowance charge is an insidious tax. People save in good faith and are being encouraged to do so, and yet if they make good investment choices and achieve better than expected growth they could ultimately pay a heavy price but they won’t see it coming.

“One wonders how much of the £126m paid to HMRC could have been avoided or reduced by taking specialist advice and making use of the available protections. With the lifetime allowance now reduced to 66% of its original starting level, it is going to create problems for many more people who have saved diligently for their retirement and it is even more important that people seek specialist advice.”

Savers with defined benefit (final salary) pensions are particularly vulnerable to the hidden risks of a LTA charge.

“At a time when the popularity, and value, of transfers out of defined benefit schemes are soaring to take advantage of the new pension freedoms, this adds another uncomfortable layer of complexity to an already thorny decision. People may transfer from an environment where they were safe from any lifetime allowance tax charge, only to find they now breach the limit,” he says.

Kate Smith, head of pensions at Aegon, said: “It is possible to protect your pension from this additional tax charge by applying online on the HMRC website. If people are concerned that they may be hit by tax charges they should seek the help of a professional adviser.”