Pension savers with too much money in their retirement funds paid £120 million in tax last year, according to official figures.
Despite encouragement from the government urging everyone to save more money for funding their retirement, anyone saving more than the lifetime allowance for pensions faces a tax penalty.
The latest figures from HMRC show that these penalties netted a third more tax in the last tax year than in the year before.
The average tax bill for around 260 savers breaching the lifetime allowance was £46,332.
The tax penalty is charged as 55% if the money is withdrawn as cash lump sum or 25% if taken as income. The penalty aims to recoup any tax relief HMRC has paid on contributions.
Tracking the lifetime allowance
The lifetime allowance is the maximum amount anyone can save into one or more pensions.
The current lifetime allowance is £1 million, and is likely to rise in line with inflation of 2.9% to £1.029 million in April 2018.
Keeping track of the lifetime allowance is not so easy if you have a final salary pension.
Final salary pensions generally have no underlying allocated fund to generate retirement income. Instead, the rule of thumb is to multiply the expected annual pension income by 20.
So, a pension paying £30,000 a year has a fund of £600,000.
The state pension is not included in the lifetime allowance.
Attack on the ultra-rich
“The lifetime allowance has been salami sliced in successive cuts to the point where it isn’t just an attack on savings incentives for the ultra-rich,” said Tom Selby of AJ Bell, the fund supermarket.
“While £1 million might sound like a lot of money, for a 65-year-old couple it buys a joint-life inflation-linked annuity worth around £21,000 a year. A healthy income but not one you’d associate with being a millionaire. At this level, the lifetime allowance feels like an extremely low bar to set if the aim is to turn Britain into a nation of strivers and savers.”
To avoid breaching the lifetime allowance, many workplace pension schemes limit contributions to £10,000 a year, rather than the £40,000 allowed by the government.
