A freedom of information request submitted by Retirement Advantage revealed the “full impact” of the lifetime allowance since it was introduced in the 2006/07 tax year, representing a 1000% increase in the total value of annual tax collected as a result of an individual’s pension exceeding the limit.
In 2006/07, the annual tax collected was less than £10m, compared to £110m in the 2016/17 tax year.
Retirement Advantage has stated that the increase has taken place since 2012, when the Government started cutting the lifetime allowance. However, the amount nearly halved falling from a peak of £1.8m to £1m, but began edging up from early April 2018 to £1.03m.
According to Retirement Advantage, these figures are “just the start” and we can expect to see the number of people affected to grow “substantially” as more people with sizeable benefits start to draw an income.
The data further revealed a “significant” increase in the number of people applying for protection, from 8,000 people when the lifetime allowance was initially introduced to 61,000 people in the 2016/17 tax year.
Retirement Advantage pensions technical director Andrew Tully 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.”
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