The amount of tax collected from individuals breaching the lifetime allowance (LTA) has rocketed by £100m since it was introduced in 2006, with the latest figures showing that £100m in tax was collected from individuals exceeding the allowance during 2016/17, compared with less than £10m in 2006/7 when the LTA was introduced.
According to Wealth at work, individuals breaching the LTA typically fall into one of three categories.
“Most employees probably think that they aren’t one of the lucky ones to have a pension pot valued at the current LTA limit of £1.03m or more – but it’s quite possible that the value of their pot is far higher than they realise and they may have already breached the allowance,” the firm said.
“This could particularly affect those who never check the value of their pension, or haven’t done so for some time. Also many employees in DB pension schemes are unaware that their pension is valued at twenty times their annual pension for LTA purposes and so an annual pension of £30,000 has a value of £600,000.
“If a member of a DB pension scheme decides to transfer the arrangement into a defined contribution scheme to take advantage of the pension freedoms, the transfer values offered can be much higher than the standard method of working out the LTA value. For example, transfer values can be as high as forty times the annual pension, and so, using the above example, an annual pension of £30,000 could have a transfer value of £1.2m and therefore exceed the LTA.”
The firm said that the second category is those employees “who think they are a long way off”.
“This group of individuals believe that they are a long way from breaching the LTA, but in fact aren’t. This is particularly the case where employees are making healthy contributions into their scheme and perhaps receiving matching contributions. Positive pension fund growth as well as a pay rise may easily push them over the LTA before they know it.
“For example, if someone aged 45 has a pension fund of £400,000 and a salary of £50,000, saves 5 per cent of their salary into their pension which rises by 3% p.a and receives employer contributions of 10 per cent, rising by 3 per cent p.a., it is possible for their pension fund to reach £1,670,000 by the time they retire at 65. By this time the LTA is expected to be valued at £1,690,000, showing they are not that far from breaching the limit.”
The third category concerns those employees who think they are protected but aren’t.
Employees who have taken protection measures and opted out of their workplace pension scheme to safeguard their savings from a LTA charge, could still be at risk of a breach. This is due to how the rules around auto-enrolment work, meaning that employees are re-enrolled every three years.
“Just one month’s contributions could invalidate a previously applied for protection, without employees even realising. Responsible employers will inform employees whom they plan to re-enrol, so that they’re aware that pension contributions will be deducted from their monthly pay,” Wealth at work stated.