Pension savers pay £110m in tax for exceeding Lifetime Allowance

More and more people are facing hefty tax bills for breaching the Lifetime Allowance (LTA) for pension savings, according to Wealth at Work, a provider of financial education and guidance in the workplace.

Introduced in 2006, the LTA limits how much you can save in pension schemes over your lifetime without triggering an extra tax charge.

Any money over the limit is subject to 55% tax if withdrawn as a lump sum, or 25% tax if taken any other way, for example pension payments or cash withdrawals.

The allowance currently stands at £1.03m — which sounds like a lot, but someone on average earnings who saves into a pension over their working life, alongside employer contributions, may well go over this limit before they reach state pension age.

The government collected £110m in tax from individuals exceeding the allowance during 2016/17, compared with less than £10m in 2006/7 when the LTA was introduced.

Wealth at Work director Jonathan Watts-Lay said: “Reaching the LTA could be closer than many employees think. For example, they may have a number of pension schemes that, when combined with their current pension provision, could exceed the allowance.

“The tax implications could be drastic and could lead to potentially many being hit with unexpected and sometimes unnecessary tax bills.”

There are steps that employees can take to either avoid or reduce the impact of the Lifetime Allowance, Wealth at Work explained.

Start by assessing your current situation. If you have more than one pension, work out the total value.

Consider alternative savings vehicles. Individual Savings Accounts (ISAs) and workplace share schemes are two tax-efficient ways to save.

Individuals can also choose to opt-out of their workplace pension scheme for LTA purposes, but it´s important to remember that you may be re-enrolled by your employer after three years. A decision to opt-out should not be taken lightly, and it may be in your best interests to remain active in your workplace pension scheme despite a potential tax charge.

Lastly, a simple way to avoid exceeding the LTA, or incurring further charges, is to stop contributing into your pension and take early retirement.

“It´s vital that you take the time to consider all options including seeking further guidance or regulated advice if required, before making what could be a life-changing decision,” Watts-Lay said.