HMRC sees 24% increase in people breaching lifetime allowance

According to recent figures released by HM Revenue & Customs (HMRC), the number of pension savers that are exceeding their lifetime allowance limit reached record highs in 2019-20.

HMRC’s recently released personal and stakeholder pension statistics show a worrying 24% increase in the number of taxpayers exceeding their annual pensions lifetime allowance. This marked a new record of 42,350 individuals reportedly breaching their lifetime allowance between April 6 2019 and April 5 2020, up from 34,260 in the previous year. With tax charges for breaching the limit as high as 55%, depending on how you draw the excess funds, those affected could be hit with a hefty tax bill. 

These latest figures give you a picture of how things were pre pandemic, before the Government introduced a 5 year freeze on allowances in last years Spring Budget. On March 3 2021, Chancellor Rishi Sunak outlined in his Budget that the lifetime allowance of £1,073,100 would remain frozen until April 2026, rather than increasing in line with inflation as it had done previously. And with inflation at levels not seen in over 30 years, we could have expected a bumper increase to allowances, certainly in the coming year. This was done in part to support the “first wave” of steps to pay back the large amount of debt incurred during the worst of the pandemic. Although it may be beneficial to the economy, pension savers will certainly continue to feel the effects of the freeze over the remaining four years. Now we can only expect these figures to increase, year on year, as more and more people will be pushed over the frozen lifetime allowance limit. 

What is the ‘lifetime allowance’?

In short, your lifetime allowance is the total amount you can build up in all your pension savings without incurring a tax charge.

In the UK, the Government restricts the total amount of tax-free value that you can have in your pension pot. For the 2022/23 tax year, this allowance is capped at £1,073,100 and will remain so until April 2026. This includes any investment returns and employer contributions that your pension has amassed over the course of its life.

If you exceed this limit, you will be charged tax on the excess amount over the limit depending on how you access the funds. If the excess is taken as an income, it will be taxed at 25%, and if the excess is taken as a lump sum, it will be taxed at 55%.

I’m worried about exceeding my lifetime allowance limit

The extra 25% or 55% tax charge could have a big impact on the value of your pension savings. If you’re not careful with managing your total pension value, you may be at risk of effectively losing capital.

It’s clear that more and more people are being caught out, but with the right planning you can find ways to manage this charge or even mitigate against it. There may also be a way to protect your lifetime allowance and avoid the charge all together. 

With the lifetime allowance freeze until April 2026, it’s more important than ever to manage your pension pot carefully. If you feel you have or may be at risk of breaching the £1,073,100 allowance limit, or are simply interested in finding out more about how you can best manage your pension pot, why not give us a call on 0333 323 9065 or book a free non-committal initial consultation with one of our chartered advisers to find out how we might be able to help you. 

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