The amount of tax paid by retirement savers putting too much money into their pensions has tripled after a succession of cuts to the allowance.
The amount of money allowed for saving in a pension is set by the lifetime allowance.
This allowance has dropped in several stages from £1.8 million in 2011-12 to £1.03 million this tax year.
In 2014-15, when the allowance was £1.25 million, HM Revenue & Customs collected £40 million in tax charges from savers who over contributed to their pensions.
The tax-take soared to £110 million in 2016-17.
Golden goodbyes are a problem for savers
The number of savers impacted by the tax charge doubled at the same time – from 1,020 to 2,410 retirement savers.
The lifetime allowance sets the maximum an individual can save across all their pensions to claim taxa relief at their marginal rate.
If the ceiling is breached, HMRC imposes a 55% tax charge which reduces to 25% if the overpayment is taken as income.
One reason more retirement savers are caught in the lifetime allowance tax net because their employers are offering such high transfer values if they leave workplace pension schemes.
Many are offered up to 30 times their expected annual pension – which means someone anticipating a £30,000 a year pension could receive a £900,000 pay-off which could easily see their fund breach the lifetime allowance limit with investment growth.
QROPS can help avoid the tax trap
However, expats can avoid the tax trap if they switch their sub-£1.03 million fund to a Qualifying Recognised Overseas Pension Scheme (QROPS).
The transfer to a QROPS is tested against the lifetime allowance cap, but providing the fund is less than the allowance, no tax is due.
Once in a QROPS offshore pension, the fund is exempt from the lifetime allowance and is free to grow beyond the cap without any tax charge.
If you think your pension fund may breach the lifetime allowance, request a valuation from your provider – or providers if there are more than one. The allowance applies to the aggregate value of all a saver’s pensions, not each fund.