On the go: LCP partner and pensions tax specialist Karen Goldschmidt has called for a simplification of the pensions tax relief limits as data released by the government show the number of people affected by annual and lifetime limits has increased.
When introduced in 2006, the annual and lifetime limits were designed to catch only those with the largest amounts of annual or lifetime pension savings.
The annual allowance was revamped in 2010 and set at a level of £50,000, while the lifetime allowance started at £1.5m in 2006, peaking at £1.8m in 2010-11, LCP stated.
Both have been dramatically reduced since then. The standard annual allowance had fallen by 20 per cent since 2010, but there are now even lower limits for high earners and those who have taken taxable cash from a pension pot.
LCP argued that the LTA policy has been inconsistent, with large cuts, freezes, restoration of price indexation, and now another long-term freeze.
The level of the LTA has dropped by more than 40 per cent since its peak. This means that the LTA, twinned with real increases in earnings and investments over the past decade, is affecting more and more people.
Figures released by HM Revenue & Customs on Wednesday show that in 2018-19, 34,220 people reported chargeable pension savings above the annual allowance, with total excess savings of £817m.
Assuming a typical tax rate of 40 per cent this would generate £326m for the exchequer, with 4,310 more individuals impacted than with the previous year’s increase of 14 per cent.
Furthermore, 7,130 people were caught out by the LTA in 2018-19, up slightly on 7,030 a year earlier. This number included 1,400 pension savers that paid a 55 per cent LTA charge and 5,730 that paid a 25 per cent charge.
Total revenue to HMRC for 2018-19 was £283m, up 5 per cent from the previous year.
Karen Goldschmidt, partner at LCP said: “The annual and lifetime limits were originally designed to catch only those with the largest amounts of pension saving in a given year or with the largest pension wealth over a lifetime.
“The Treasury has increasingly seen pensions tax relief limits as a ‘go-to’ source of additional revenue, especially compared with raising headline tax rates.”
She added: “We now have a system subject to constant change and uncertainty, with considerable complexity and with no obvious and coherent rationale. It is time for a fundamental rethink of tax relief limits to come up with a system that is simpler, less distorting, and which will stand the test of time.”
Andrew Tully, technical director at Canada Life, commented: “We have also seen a 6 per cent increase in savers being caught out by the LTA, with the tax now bringing in £283m compared with £269m in the previous tax year.”
Interestingly most savers choose to pay the tax charge of 25 per cent and retain the money in the pension, rather than opt for the rather more salty lump sum charge of 55 per cent.
“The LTA has since been frozen for the next five years, meaning more and more people will get caught by this relatively arbitrary figure, with the Treasury expecting to raise an additional £1bn in tax,” Tully said.
