Thousands expected to be in breach of pensions Lifetime Allowance

Are you at risk of facing a 55% tax charge? 

New analysis* published in March by mutual insurer Royal London has shown, for the first time, how many of today’s workers are at risk of breaching the £1.03m lifetime limit for pension tax relief over the course of their working life, as well as the numbers who are already over the limit but may not realise.

The Lifetime Allowance (LTA) has been cut three times since 2010, and this report estimates that around 290,000 workers already have pension rights above the limit and well over a million more people are at risk of breaching it by the time they retire.

Those who exceed the LTA could face a tax charge of up to 55% of their pension savings above this level.

Who’s most likely to breach the Lifetime Allowance? 

• Around 290,000 non-retired people have *already* built up pension rights in excess of the Lifetime Allowance; fewer than half of these are thought to have applied for ‘protection’ against past reductions in the LTA and so could face big tax bills when they draw their pension; many may be unaware of this;

• Almost half of these people who are already over the LTA are continuing to *add* to their pension wealth, thereby storing up an even bigger tax charge with every passing year;

• Amongst non-retired people who are not currently over the LTA, an estimated 1.25 million can expect to breach the LTA by the time they retire; the two main groups likely to breach are:

  • Relatively senior public sector workers with long service, whose Defined Benefit pension rights will exceed the LTA, especially as they now have to work to 65 or beyond rather than 60 as in the past; 

• Relatively well paid workers in a Defined Contribution pension arrangement where their employer makes a generous contribution into their pension pot; typical salary levels of those affected are in the range £60,000-£90,000 per year; (ironically, the very highest earners may be less affected by the Lifetime Cap because they are now heavily limited by the amount they can put in to a pension each year);

• Available data suggests that only a couple of thousand people exceeded the LTA in the latest year for which figures are available (2016/17); the number likely to face a tax charge could therefore increase more than a hundredfold, purely based on those who have yet to retire but who have already exceeded the LTA;

Wages rising ahead of price inflation drives people into trap

The research finds that one of the reasons why so many people will exceed the LTA is that current policy is simply to increase it each year in line with price inflation (as measured by the CPI).  By contrast, wages will tend to grow faster than inflation and the money invested in pension pots should grow faster than inflation over the long-term.

This means that the LTA  will ‘bite’ progressively more severely over time and will drag in hundreds of thousands of workers who would not regard themselves as ‘rich’.

Commenting, Steve Webb, Director of Policy at Royal London said:

“This research shows, for the first time, how the drastic cuts in the Lifetime Allowance mean that large numbers of workers will now be caught by a limit that was originally only designed for the super-rich.  

It is shocking that over a quarter of a million people have already breached the LTA and that many of these are still adding to their pensions.  They are likely to get a nasty shock – and a big tax bill – when they do finally draw their pensions. 

And more than a million further workers who are not currently over the LTA could find themselves in breach unless they take action.  This is truly a Lifetime Allowance time-bomb.  

Many workers, especially those in Defined Benefit pension schemes, will have little idea that this is an issue and could be heading for a nasty jolt.  The Government needs to think hard about how to make sure people are aware of these limits in time to make alternative arrangements, and individuals need to take expert advice if they are to avoid potentially huge tax bills”.

If you are concerned about breaching the Lifetime Allowance, get in touch and we can help.

* The research is based on detailed analysis of data on more than 7,700 workers from Wave 1 and Wave 5 of the ‘Wealth and Assets Survey’. This is the first time that micro data which follows individuals over time and tracks their pension wealth has been used to project the impact of the LTA on today’s working age population.