The drop in the lifetime allowance has led to a 2,100 per cent increase in the government’s tax take, in the 2016/17 tax year compared to the 2006/07 tax year, a freedom of information request by Old Mutual Wealth has shown.
In 2016/17, the government collected £110m from 2,410 people who were over the lifetime allowance. Since 2006 there has been 1,047 per cent increase in the number of people impacted by the lifetime allowance from 210 to 2,410. From 2015/16 to 2016/17 there was a 40 per cent increase.
Old Mutual Wealth pension specialist Ian Browne commented: “On the outset a lifetime allowance of at least £1m seems completely reasonable. Once they hear such a large figure people are likely to tune out, convinced it will have nothing to do with them. This underestimates the power of compounding interest, investment, tax-free growth and continual pension contributions. As a long term investment, what might seem like a modest amount, could exceed the allowance by the time you start to withdraw. People should not mistake that the lifetime allowance is just a concern for the top 1 per cent. In fact, the allowance would need to go up to over £4.5m if it were just to impact the top percent of the population.
“Planning ahead can ensure that you still make the most out of your pension, without having to pay undue tax. It’s important to ensure you are making use of your other allowances as well such as the capital gains tax allowance, the dividend allowance and maxing out your ISAs. Once you have maximised your other allowances, offshore bonds will help you continue to save in a tax efficient environment. Together these all form part of your overall retirement plan. It’s also worth remembering that your spouse or partner will also have a lifetime allowance and so it may be worth investing in their pension rather than your own. It’s also worth considering if you want to fund your pension to pass it on to a love one. You can nominate a beneficiary through an expression of wish form and this person can draw amounts of your pension. Even if the amount is in excess of LTA, it will be more tax efficient than paying inheritance tax. Plus the amounts from your pension do not contribute to your beneficiaries’ lifetime allowance.”
Browne said for those who are already approaching the LTA, they should check if they are eligible for fixed or individual protection 2016.
“Individual protection is only for those who had savings of at least £1m in April 2016, when the allowance was lowered from £1.25m to £1m. The protection allows savers to retain the lower of your pension value at April 2016 or £1.25m. There is no minimum pension value required for fixed protection, which also allows you to keep the £1.25m allowance. But making any new pension contributions after 5 April 2016 voids the protection and your allowance will go back to £1m,” he added.