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UK annual and lifetime allowance pension charges soar

Even before thresholds were frozen by the chancellor in 2021

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HM Revenue & Customs (HMRC) has published its pensions statistics for the 2019-20 financial year, with the data showing a large increase in pension contributions.

A total of £31.3bn ($42bn, €37bn) was paid into personal pensions in the financial year, up 12% from the previous period. The number of people contributing stayed the same at 9.4 million.

But as contributions soared, so have annual and lifetime allowance charges.

In 2019-20, 42,350 taxpayers reported contributions exceeding the annual threshold through self-assessment – a limit that has mainly impacted public sector workers and NHS doctors recently.

The value of the exceeding contributions reported was £949m in the financial year – up from the £819m in the 12 months prior.

Similarly, 8,510 lifetime allowance charges were reported with a total value of £342m – a 21% increase from 2018-19.

It is worth noting that these increases took place the financial year before chancellor Rishi Sunak froze personal allowance thresholds in his Spring budget 2021, which is likely to have pushed even more people over the allowance limits.

Good news, bad news

Ian Browne, pensions expert at Quilter, said: “There are lots of good news stories to be taken from the recent pension figures coming out of HMRC this morning. First is that a huge £31.3bn was contributed to personal pensions in 2019 to 2020, up 12% on the previous year.

“This really shows that pre-pandemic the public was starting to understand the need to start prioritising saving for retirement as the state pension alone is unlikely to come anywhere close to providing the kind of retirement lifestyle many aspire to.

“However, what these figures will look like post pandemic is yet to be seen and as we now as we enter a cost-of-living crisis people may understandably prioritise money in their pocket today over ploughing money into their pension.

“The bad news is that the figures also show that our highly complex tax system is catching an increasing number of people out as annual allowance and lifetime allowance charges begin to soar. This is likely to get even more pronounced in future data sets due to the various frozen allowances announced at the last budget.

“The government should be doing everything it can at present to encourage savers to put money away for their retirement. While auto-enrolment has been a very successful step in the right direction, it’s important that the highly complex rules around the annual allowance and lifetime allowance don’t hamper the good work the policy has done.

“These rules require an intricate knowledge of the UK’s pension landscape to understand and therefore time and time again catch people out.

“With the right advice and with the right holistic retirement plan, the effect of the lifetime allowance charge can be mitigated. Either avoiding the charge, deferring part of the charge or potentially reducing it can do this and which route will depend on the individual circumstances of the person.

“However, this is a complicated area of the pensions landscape and without professional financial advice someone could be facing a 55% immediate tax charge on the excess.”

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