New data has revealed that pensions who have 'saved too much' are being penalised by the taxman with huge tax bills.
A freedom of information request from the Telegraph has revealed the total amount of tax paid by people whose pension savings exceed the £1 million lifetime limit has soared by 33% over the past 12 months to £120 million.
Given that there are relatively few pensioners with over £1 million in their pension pot this works out as an average tax bill of £46,332 for those who have managed to save a large amount for their retirement.
Shifting the goal posts
Many pensioners have faced a double problem.
The lifetime allowance – that’s the maximum amount you can save for retirement – has gradually lowered in recent years from a peak of £1.8 million to £1 million.
But, simultaneously, the stock markets have enjoyed bumper performances meaning the value of pensions has soared.
In the 2016/17 tax year, 2,590 people found themselves facing an extra tax charge because the value of their pension exceeded the £1 million allowance.
If your pension pot is worth more than £1 million – and you haven’t been able to apply for individual or fixed protection to protect your pot – then the amount over £1 million is subject to either a 55% tax charge if you take it as a lump sum or a 25% additional tax on top of Income Tax if you take it as income.
So, either way, you’ll kiss goodbye to around half your pension savings over the £1 million limit when you access them.
Why is this happening?
The reason for the vicious taxing above the lifetime limit is that the government is trying to claw back some of the losses it makes from giving tax relief on pension contributions.
The government misses out on billions of pounds in tax revenue because of pension tax relief and it has been trying to reduce this loss by decreasing the lifetime allowance.
But, experts now say the lifetime allowance is unfair as it isn’t just clawing back tax relief from the lucky few who can afford to save a lot into their pension – it is also punishing people who have enjoyed good investment growth on their pension pot.
Should the lifetime allowance be scrapped?
There are now calls to scrap the lifetime allowance and simply use the annual allowance to stop the particularly wealthy from enjoying excessive tax relief on their pension contributions.
The annual allowance stops people paying more than £40,000 a year into their pension – go above that and you stop getting tax relief and have to pay a tax charge too.
For people earning over £150,000 a year the annual allowance gradually falls to £10,000 a year on a sliding scale.