LCP calls for simplified tax relief ceiling for pensions – DB & Derisking
When introduced in 2006, annual and lifetime limits were designed to only take into account those with the largest amounts of annual or lifetime retirement savings.
The annual allowance was revamped in 2010 and set at £ 50,000, while the lifetime allowance started at £ 1.5million in 2006, peaking at £ 1.8million in 2010-11, a declared LCP.
Both have been drastically reduced since then. The standard annual allowance had fallen by 20 percent since 2010, but there are now even lower limits for high earners and those who have withdrawn taxable money from a pension fund.
LCP argued that LTA’s policy was inconsistent, with deep cuts, freezes, reinstatement of price indexation and now another long-term freeze.
The level of LTA has fallen more than 40 percent since its peak. This means that LTA, coupled with real increases in income and investment over the past decade, is affecting more and more people.
Figures released by HM Revenue & Customs on Wednesday show that in 2018-19, 34,220 people reported billable retirement savings above the annual allowance, with a total surplus savings of £ 817million.
Assuming a typical tax rate of 40 percent, that would generate £ 326million for the Treasury, with 4,310 more people affected than with the 14 percent increase from the previous year.
In addition, 7,130 people were caught by the LTA in 2018-19, up slightly from 7,030 a year earlier. This number included 1,400 retirement savers who paid 55 percent LTA fees and 5,730 who paid 25 percent fees.
HMRC’s total turnover for 2018-19 was £ 283million, up 5% from the previous year.
Karen Goldschmidt, Partner at LCP, said: “The annual and lifetime limits were originally designed to only consider those who have the most retirement savings in a given year or the largest retirement wealth over a lifetime.
“The Treasury has increasingly viewed the limits on pension tax breaks as a ‘must’ source of additional income, especially in relation to rising overall tax rates.”
She added: “We now have a system subject to constant change and uncertainty, with considerable complexity and without clear and consistent justification. It is time to fundamentally rethink the limits of tax breaks to deliver a system that is simpler, less distorting and that will stand the test of time. “
Andrew Tully, CTO of Canada Life, said: “We have also seen a 6% increase in the number of savers defaulted by the LTA, with the tax now bringing in £ 283m, up from £ 269m. pounds sterling in the previous fiscal year.
Interestingly, most savers choose to pay the 25 percent tax burden and keep the money in the pension, rather than the slightly higher lump sum charge of 55 percent.
“The LTA has since been frozen for the next five years, which means more and more people will be taken by this relatively arbitrary figure, with the Treasury expecting to raise an additional £ 1 billion in taxes,” said Tully.