More caught by pension allowances: but more flexibility means lower penalties
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- 47,880 people with personal pensions were caught out by the pension annual allowance in 2018/19.
- This is up almost a third in a year, and is more than four times the number who fell foul of the rules before the tapered annual allowance was introduced in 2016/17.
- 7,130 people were caught out by the lifetime allowance, up 100 from a year earlier.
- However, there was a rise in people who faced a 25% charge and took the money as income, and a fall in those who paid a 55% charge and took the money as a lump sum.
HMRC has issued figures on contributions to and benefits paid by private pensions:
Sarah Coles, personal finance analyst, Hargreaves Lansdown:
“The hideous complexity of planning pension contributions when you’re on the cusp of the tapered annual allowance helped push almost 50,000 people over the annual allowance in 2018/19. The freezing of the annual pension allowance means we’re likely to see that number continue to climb.
The number of people falling foul of the lifetime allowance crept up again, and will continue doing so for years to come as the allowance is frozen. However, there are signs that where people have built enough flexibility into their retirement plans, they are finding ways to pay less of a penalty for breaching the limit.
Annual allowance
“The number of people being caught out by the pensions annual allowance jumped when the taper was introduced back in 2016/17, and has been rising ever since. The number of breaches which were paid for through schemes more than doubled in the year to 2018/19.
This is partly due to the fact that during this period, the threshold at which the taper kicked in didn’t move, so that anyone with a taxable income over £150,000 faced the taper. The rules changed in April 2020.
Lifetime pension allowance: signs of tax planning
The number of people being caught by the lifetime allowance is up slightly in a year, but the most striking change is to the way people are taking the benefits – and many of them will be paying less tax as a result.
The proportion of people choosing to pay 25% tax and use the rest of provide a pension income has hit 80%. This is up from 62% five years earlier. The rest choose to take a lump sum, taxed at 55%.
Part of this will be due to the fact that as time goes on, more people will have defined contribution pensions in the mix, so have more freedom to take money out of their pension in the most tax efficient way possible.
The system was established so there would be parity between those who paid 55% on the lump sum and those who paid 25% on income and then paid 40% tax on the remainder. However, if people are able to take an income below the higher rate threshold, and boost their income from untaxed sources, such as ISAs, they can bring their overall tax bill down.
It also owes something to rule changes brought in during 2015, which meant that money could be passed within a pension after your death, free of inheritance tax. It means that those with significant sums outside a pension could take income below the higher rate tax threshold, eat into other assets during their lifetime, and then pass on their pension free of inheritance tax.”
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