Retirement savers trapped by annual and lifetime benefits


A significant number of savers have to remit large charges to the tax authorities because they have violated their retirement allowances

Saving as much pension as possible makes good sense for all of us. After all, this money must last us through our twilight years – it may not even be possible to just take a new job to supplement a mediocre pension.

Relying on the state pension is an equally risky decision, given that it is already one of the least generous in the developed world.

It is therefore fortunate that the automatic affiliation scheme – where employees are automatically enrolled in a pension by their employer, who also contributes to the pension – has been so successful, with millions of savers now contributing to a pension which otherwise not be.

Unfortunately, it seems that the rules regarding annual and lifetime retirement allowances are catching a growing number of people, placing significant burdens on them.

Reach the allowance

First of all, it’s worth remembering exactly how these allowances work.

The annual allowance, as the name suggests, is the maximum amount that can be saved in a person’s pension funds during a fiscal year before having to pay taxes on those contributions. It currently stands at £ 40,000.

And then the lifetime allowance covers the maximum amount that a saver can pay into their pension over their lifetime before they start paying tax on it. The annual allowance is currently £ 1,073,100.

Cough for passing the allowance

New figures released this week by HM Revenue & Customs show a marked increase in the amounts that savers have started to put into our pensions in recent years.

For example, in the 2019-20 tax year, £ 31.3 billion was paid into personal pensions, up from £ 27.9 billion the year before. In addition, the total value of personal pension contributions has increased by an average of 11% per year over the past three years.

But these larger contributions see more people falling under allowance limits. That same HMRC data revealed that over 21,000 annual allowance charges have been reported, worth a total of £ 253million.

This is a 20% increase over the previous year.

It’s a similar story with the Lifetime Allowance, where there was a 21% increase in the value of reported charges to £ 342million.

So why are more and more savers breaking these rules?

Withdrawal of allowances

The first contributing factor here is the fact that these allowances have been reduced several times in recent years.

A little over ten years ago, the lifetime allowance was £ 1.75million, while the annual allowance was £ 245,000. However, time and again Chancellors have seen these allowances as a simple way to save a few pounds, bringing them back to their current levels.

Inevitably, this resulted in many more people picking up on them and realizing that they are required to remit large charges to the Consolidated Revenue Fund.

Unnecessarily complex

Another important factor here is that the system is incredibly complex. This is because there are not only annual and lifetime allowances to keep in mind, but also cash purchase allowances and degressive allowances.

The annual money purchase allowance (MPAA) applies to people who have started to draw on their pension funds through retirement freedoms, but who still wish to contribute to this fund.

This is something that has happened quite a bit over the past year and a half, with savers choosing to free up some of the money from their fundraisers to support them during the pandemic, without necessarily wanting to retire completely and they therefore continued to contribute to their pension. .

If you trigger the MPAA, the annual allowance drops from £ 40,000 to just £ 4,000.

Meanwhile, the declining annual allowance is actually a reduction of the normal annual allowance for high earners, depending on the precise amount they bring in. Currently, it applies to those with a ‘threshold income’ of over £ 200,000 and an ‘adjusted income income’ of over £ 240,000.

As Tom Selby, head of retirement policy at AJ Bell said, this is a perfect example of the “the horrible complexity of the retirement system ”that we currently support.

At the end of the day, the system doesn’t have to be that complex. It is perfectly possible to set general parameters to determine how much people can contribute to their pensions each year, and over their lifetime, before they have to start paying taxes without ending up in the confusing maze of thresholds and thresholds. restrictions.

Unfortunately, the tax authorities actively take advantage of this complexity, as it means that people have a harder time planning and, as a result, break the rules.

I think Jon Greer, head of retirement policy at Quilter, got it all when he said: “While automatic enrollment has been a very successful step in the right direction, it is important that the very complex rules surrounding the annual allowance do not hamper the good work being done by the police.

“These rules require in-depth knowledge of the UK pension landscape to understand and therefore, time and time again, catch people.”

Requiring savers to have this level of knowledge in order to avoid these fees is ridiculous and counterproductive.


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