‘Wake-up call’ for pension holders as thousands face potential tax charges
Thousands of pension savers potentially face tax charges as they have more than the lifetime allowance sitting in their personal pensions, figures indicate.
Around 2,300 people have been paying into personal pension schemes exceeding the lifetime allowance of £1,073,100, according to HM Revenue and Customs (HMRC) data.
InvestingReviews.co.uk obtained the figures from HMRC following a freedom of information (FOI) request.
The figures also show that around 100 people have been actively contributing into funds worth £4 million-plus.
The data covers the tax year ending April 2020 and specifically covers active contributions being made into certain pensions during that tax year, so the figures will not be fully complete.
The lifetime allowance is the maximum amount of pension saving subject to tax relief that a person can build up over their lifetime.
The rate of tax paid on pension savings above the lifetime allowance depends on how the money is paid. It can be as much as 55% if it is taken as a lump sum.
Experts have warned that people may find themselves sleepwalking into tax charges and some may want to consider alternative savings options, such as Isas.
InvestingReviews.co.uk chief executive Simon Jones said: “These numbers should serve as a huge wake-up call for pension holders across the country.
“With the taxman poised to swoop on anyone breaching the lifetime allowance, it’s never been more important for people to plan ahead and see how they can avoid losing big chunks of their retirement pots.”
People usually pay tax if their pension pots are worth more than the lifetime allowance. They will receive a statement from their pension provider saying how much tax they owe.
The amount that counts towards the allowance depends on the type of pension pot someone has, and if they are in more than one pension scheme they should factor in all the schemes they belong to.
In some cases, savers with funds above £1,073,100 may not be subject to a lifetime allowance charge.
The lifetime allowance has been reduced over time, and people may be able to apply to protect their lifetime allowance from the reduction.