Commenting, Steve Webb, partner at LCP said: “Although pension wealth of more than £1 million will seem a huge amount to most people, probably more than a million people of working age can expect to breach that threshold based on current policies. What people need in pension planning is certainty. But with the LTA we have seen the opposite. First it was slashed, from £1.8m to £1m, then frozen, then linked to inflation and now frozen again. It is almost as if the government doesn’t have a long-term plan but makes it up as they go along”
Background
What is the LTA, how does it work, how many people pay tax charges each year?
The Lifetime Allowance (LTA) is a cap on the total amount of pension saving you can do and still benefit from tax relief. It’s not ‘illegal’ to go above the LTA, you just pay a tax charge – effectively equivalent to handing back the tax relief you got on the last slice.
There are two rates of tax charge depending on whether the money you take above the LTA is in the form of income, or is in the form of a lump sum (Eg a chunk of money out of a ‘pot of money’ pension). These tax charges are:
- 25% tax charge on income from pensions above the LTA
- 55% tax charge on lump sums above the LTA (this sounds tough but part of it is the tax people would have paid on this money during retirement in any case)
(Source: Tax on your private pension contributions: Lifetime allowance - GOV.UK (www.gov.uk))
The LTA saves the government money in two ways:
a) People who breach the LTA and pay a tax charge;
b) People who are put off pension saving because they are approaching the LTA – these people don’t save into a pension and therefore the Treasury doesn’t have to pay out tax relief to them;
The official figures on LTA tax charges are a bit out of date, but the latest ones are here: Table 8- Lifetime Allowance.xlsx (publishing.service.gov.uk) In the latest year that they show, 4,550 people paid charges of £185m (or to be more precise, their pension scheme paid the charges on their behalf). What happens in practice with a final salary type pension is that the pension scheme pays a big bill in one go to the Treasury for a retirement lifetime’s worth of charge and the member experiences this as an equivalent reduction in their annual pension for the rest of their life).
Revenue from this source doubled in the two years to 17/18 (ie compared with 15/16).
The table also shows how the LTA has been cut and was then frozen at £1m in 2017/18. Since then, the rates have been:
2018/19 £1,030,000
2019/20 £1,055,000
2020/21 £1,073,100
In 2015 it was announced that the LTA would rise in line with the Consumer Prices Index from April 2018 onwards.
When they announced the cut to £1m in the 2015 Budget, the Red Book said: “Over 96% of individuals currently approaching retirement have a pension pot worth less than £1 million, so this change will affect only the wealthiest pension savers” (para 1.232
Budget 2015 - The Red Book (publishing.service.gov.uk))
But over time this could be a much bigger issue. I wrote a paper a few years ago about the Lifetime Allowance ‘timebomb’ (royal-london-policy-paper-31---the-lifetime-allowance-timebomb.pdf) This paper was based on the CPI policy being retained, but even on that assumption I found:
- Around 290,000 non-retired people *already* sitting on pension wealth above the LTA but not having triggered the charge (you only pay the charge when you start to draw the pension or lump sum;
- Around 1.25m non-retired people not yet over the LTA but projected to be so on reasonable assumptions;
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