1,000% rise in LTA tax collected over a decade

Fuelled by ‘continuous cuts’ to allowance threshold

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Tax collected by HM Revenue & Customs (HMRC) from savers breaching the pensions lifetime allowance (LTA) has surged exponentially over the last 10 years.

Research by accounting and consultancy firm Mazars found that LTA tax collected increased by 1,068% between 2010-11 and 2019-20.

In 2010-11, HMRC billed £32m for lifetime allowance breaches, whereas in 2019-20, the sum soared to a whopping £342m ($460m, €410m).

Mazars believes the steep increase is mainly due to more individuals being caught by the threshold following “continuous cuts to the maximum amount people are able to save into a pension”.

The number of savers breaching the LTA went to 8,510 from 890 – a 956% increase – over the period.

At the same time, the lifetime allowance threshold dropped by more than 40% to £1,055,000 in the 2019-20 financial year, to be slightly increased to £1,073,100 in 2020-21, to then be frozen at that rate until at least 2026.

‘Planning ahead is so crucial’

Ian Pickford, partner at Mazars, said: “Thousands of people have been dragged into paying additional tax on their pension savings in the last decade.

“With the lifetime allowance threshold on ice until 2026, this upward trend won’t slow down, hitting both defined benefit (DB) and defined contribution (DC) pension savers, especially those with generous pension perks. It’s closer than many people think.

“Freezing the cap is effectively a punishment on saving into a pension, the very thing people are encouraged to do. And the reality is that a £1m pension pot won’t go as far as many believe. Outgoings, like care costs or supporting children or grandchildren, have the potential to swallow up a large chunk of this, even just a short time into later life.

“This is why planning ahead is so crucial. Firstly, to know if you are on track to breach the lifetime allowance and secondly, to weigh up the benefits of continuing to contribute to a pension against other ways of saving for later life.

“Increasingly, we are seeing people turn their backs on pensions as a means of income provision in later life, opting to use them as a way to pass down wealth. All the time your money is in a pension, it is growing free of income and capital gains tax (CGT) and for those lucky enough to have built up other savings, it’s likely a pension will be the last pot to access.”

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