Pensions savings cap lands retired with £230m tax bill

Tax authorities have recouped more than £230m in charges from retired people caught out by the introduction of a cap on lifetime pension savings, according to official figures.

A Freedom of Information request submitted to HM Revenue & Customs, and seen by the Financial Times, showed nearly 4,000 individuals faced tax bills averaging almost £50,000, between 2007-08 and the current financial year.

The Lifetime Allowance governs how much can be saved in a pension and receive tax relief. At retirement, any benefits above the allowance are taxed at either 55 per cent or 25 per cent, depending on whether the fund is taken as income or a lump sum.

However, the government has steadily reduced the allowance as it sought to reduce the deficit.

According to the FOI, £234m in charges has been levied for breaches of the LTA since a cap was introduced by the Labour government in 2006, initially at £1.5m.

However, the annual amount collected peaked at £52m in 2012-13, up from £8m in 2007-08, soon after the coalition government targeted wealthy taxpayers for austerity savings and cut the allowance from £1.8 to £1.5m.

“A lot of people were unaware of the cuts to the allowance, or the steps they could take to protect their savings, and have been inadvertently caught out,” said Claire Trott, head of technical support with Talbot & Muir, a pension provider that submitted the FOI request.

“It’s terribly unfortunate for those who were unaware . . . Since the LTA fell to £1.5m in 2012, average tax bills have got a lot higher, reaching £100,000 or more in some cases.”

Industry experts warn far more could get caught out by a new cut in the allowance from £1.5m to £1.25m in April, the third fall in as many years.

According to the FOI, 2,568 individuals paid a total of £96m in LTA charges when they took their retirement funds as pension income between 2007 and the current tax year, attracting a 25 per cent charge on benefits above the LTA.

Nearly 1,500 individuals paid a total of £138m in charges over the same period, where their funds were taken as a cash lump sum, instead of income, attracting a higher 55 per cent charge.

Henry Denne, head of private clients with Punter Southall, the pensions consultants, said: “The previous cuts have hit board level executives, lawyers, doctors and dentists. But with the cut to £1.25m, it moves the issue out of the boardroom to senior managers in regional areas in the UK. These people won’t assume they will be affected.”

Industry experts say the lowered lifetime allowance of £1.25m is broadly equivalent to a maximum pension for a defined benefit scheme member of £62,500 a year.

“People may think all the talk of a £1.25m Lifetime Allowance is like pie in the sky,” said Andrew Tully, pensions technical director at MGM Advantage, a pension provider. “But many people could find themselves fall foul of the rules and unsuspectingly get caught out by a tax charge.”

HMRC said that where an individual’s LTA is exceeded, a tax charge will be payable intended to recover the excess relief given on savings above the individual’s LTA.

“Individuals therefore have a choice of whether to stop saving in a registered pension scheme when they reach the LTA, or continuing saving but have the excess over their LTA subject to the LTA charge,” it said.