Since the UK’s lifetime allowance of pension benefits was introduced in 2006, the amount of taxes collected from individual pensions exceeding the limit has risen 1000% in 10 years to £110 million from £10 million, according to income specialist Retirement Advantage.
The lifetime allowance is a limit on the amount of pension benefits that can be drawn from pension plans, and can be paid, without triggering an extra tax charge, whether it’s in the form of a lump sum or retirement income. As the current limit for the lifetime allowance is £1.03 million, any pension savings over that amount will be subject to the lifetime allowance tax.
The tax rate paid on pension savings above the allowance is 55% if the payment is taken as a lump sum, and 25% if it’s received through pension payments or cash withdrawals.
“The numbers paint a stark picture of how the lifetime allowance has impacted savers,” Andrew Tully, pensions technical director at Retirement Advantage, said in a release. “There is an obvious link to make between the increase in tax take and the slashing of the lifetime allowance over the last six tax years,” he said, adding that “this is just the start, and the government’s tax take from the lifetime allowance will continue to grow substantially in [the] future.”
The data, which Retirement Advantage received via a Freedom of Information request, also shows a sharp rise in the number of people applying for protection, to 61,000 people from 8,000 people between 2006 and the 2016/2017 tax year.
The majority of the increase has taken place since 2012 when the government started cutting the lifetime allowance, which fell to £1 million from a peak of £1.8 million, but has since edged up to its current £1.03 million.
“The lifetime allowance is an arbitrary tax which penalizes individuals who have enjoyed good returns on their investments,” said Tully. “There is also a significant disparity in the way benefits are measured against the lifetime allowance depending on whether the individual is a member of a defined benefit or defined contribution scheme … there is an argument the lifetime allowance should be scrapped.”