Skip to main content
Skip to main content

Newsroom

Andrew Tully, pensions technical director, Retirement Advantage
It seems clear this is just the start, and the Government’s tax take from the lifetime allowance will continue to grow substantially in future.
Andrew Tully, pensions technical director, Retirement Advantage
London,
02
May
2018
|
10:05
Europe/London

FOI request reveals 1000% increase in tax take from Lifetime Allowance

  • Freedom of Information request reveals 1000% increase in annual tax take from impact of lifetime allowance - £110m in 2016/17 (up from less than £10m in 2006/07)
  • Significant increases over last few years since Government started reducing the lifetime allowance
  • Number of individuals registering for protection increases from 8,000 in 2006/07 to 61,000 in 2016/17

A Freedom of Information1 request submitted by Retirement Advantage, the retirement income specialist, reveals the full impact of the lifetime allowance since it was introduced in the 2006/07 tax year. It shows there has been a 1000% increase in the total value of annual tax collected as a result of individual’s pensions exceeding the limit, up from less than £10m in 2006/07, to £110m in the 2016/17 tax year.

Most of the increase has taken place since 2012 when the Government started cutting the lifetime allowance. It nearly halved falling from a peak of £1.8m to £1m, although it started edging up from 6 April 2018 to £1.03m. This suggests these figures are just the start, and we can expect to see the numbers of people affected grow substantially as more people with sizeable benefits start to draw an income.

The data also shows a significant increase in the number of people applying for protection, from 8,000 people when the lifetime allowance was introduced, to 61,000 people in the 2016/17 tax year.

Andrew Tully, pensions technical director at Retirement Advantage, commented: ‘The numbers paint a stark picture of how the lifetime allowance has impacted savers. There is an obvious link to make between the increase in tax take and the slashing of the lifetime allowance over the last 6 tax years. It seems clear this is just the start, and the Government’s tax take from the lifetime allowance will continue to grow substantially in future.

‘The lifetime allowance is an arbitrary tax which penalises individuals who have enjoyed good returns on their investments. There is also a significant disparity in the way benefits are measured against the lifetime allowance depending on whether the individual is a member of a defined benefit or defined contribution scheme. And with a relatively low cap on contributions to pensions of £40,000 a year, and less for higher earners, there is an argument the lifetime allowance should be scrapped.

‘The number of individuals applying for Protection has gone through the roof in the 2016/17 tax year, which is to be expected as this was when the lifetime allowance fell from £1.25m to £1m, with two protection options available to those who thought they may be affected. Another contributing factor may be the significant increase in the numbers of people transferring benefits from a final salary scheme, who are looking to protect benefits they have built up.

‘The lifetime allowance is a complicated area of pension planning and it is all too easy to get caught out, so anyone concerned about the limit should consult a professional financial adviser. Remember all of your pension benefits are included in any calculation around the limit.’

Lifetime Allowance history

The lifetime allowance was introduced as part of pension simplification in 2006 and replaced eight different systems to limit pension benefits. It aims to limit the value of payments from any pension schemes, be that final salary / defined benefit arrangements, defined contribution or personal pensions, for example SIPPs, before additional tax charges occur. These additional tax charges on any excess benefits above the lifetime allowance will depend on whether the individual chooses to withdraw a lump sum (incurring a tax charge of 55%) or take as income (incurring a tax charge of 25% in addition to income tax).

The current limit for the lifetime allowance (tax year 2018/19) is £1.03m. Any pension savings over that limit will be subject to the lifetime allowance tax charge, unless the individual has applied for some form of protection. To provide some context for the £1.03m limit, this would currently provide an annual lifetime income of around £25,387 for someone aged 652. However a member of a defined benefit scheme could receive a pension of £51,500 a year.

Link to factsheet which gives more detail > http://www.retirementadvantage.com/downloads/40-333-the-lifetime-allowance-and-benefit-crystallisation-events.pdf

Full FOI Request Data

Tax year

No. people paying a tax charge of 25% on income

No. people paying a tax charge of 55% on lump sum withdrawals

Total value of tax collected

No. individuals with Protection

Lifetime Allowance

2006/07

160

50

Less than £10m

8,000

£1.5m

2007/08

160

50

Less than £10m

7,000

£1.6m

2008/09

160

100

£10m

8,000

£1.65m

2009/10

140

140

£10m

7,000

£1.75m

2010/11

140

160

£10m

Less than 1,000

£1.8m

2011/12

190

170

£20m

15,000

£1.8m

2012/13

220

220

£20m

9,000

£1.5m

2013/14

520

410

£40m

22,000

£1.5m

2014/15

660

360

£40m

21,000

£1.25m

2015/16

1040

560

£80m

6,000

£1.25m

2016/17

1830

580

£110m

61,000

£1m

Source: Retirement Advantage FOI submitted to HMRC

Boilerplate
  1. Source: Freedom of Information request submitted by Retirement Advantage to HMRC and answered on 10.4.18.
  2. Source: Money Advice Service annuity tables as at 24.4.18. Quote based on a net purchase price of £1,030,000, and includes 50% spouse benefit, 10 year guarantee and RPI escalation.