There has been a rise of 200% in the amount of tax paid over the lifetime pension tax limit in the last 4 tax years according to a recent freedom of information request.
This has risen from £12m in 2012/13 to £36m in 2015/16, with an 80% increase in the last tax year alone.
Although a minority, some people may choose to incur a tax liability as part of their wider retirement income planning. However, the vast majority of this tax haul will represent pension savers who do not know they are above the limit and so unwittingly incur a tax bill. This brings 2 big financial problems to their doorstep:
- An unexpected and unplanned tax bill that will need to be paid by the 31 January of the year following the end of the tax year.
- A problem for their future retirement savings plans as they will have to look elsewhere than their pension to save more for their retirement or face a tax bill every year.
With maximum lifetime allowance limits now at £1m and annual allowance limits at £40,000 this is an annual problem for many higher earners and those with larger defined contribution pensions and long standing and high performing defined benefit pensions.
Whilst little can be done to change the problem, there is a really simple solution to help people affected:
- First they need to understand there is a problem and that comes from education.
- Second for those who may be affected but don't actually know that they are, they need professional help to calculate their position, see if they have any unused allowances to carry forward and the extent of their liability.
- Third for those above these limits going forward they need a plan as to how and where they will find suitable alternative investments to plan for their retirement.
Managing lifetime and annual pension tax allowances is not easy but it is possible with the right education and advice.
Tax rules are based on current tax legislation and may be subject to change.
Pension savers caught by lifetime allowance rule change See comments (1)Financial Adviser By Stephanie Hawthorne Tax paid to the Exchequer by pension savers who have exceeded their lifetime allowance has increased by 80 per cent following a tightening of the rules.The tax take has climbed to £36m last year up from £20m in 2014/15, according to a Freedom of Information request by Salisbury House Wealth.Over the last five years the tax imposed on exceeding the lifetime allowance has climbed from £12m in 2012/13 to £19m in 2013/14, £20m in 2014/15 and £36m in 2015/16.