A freedom of information request from Old Mutual Wealth (OMW), also uncovered that the reduction of the LTA to £1m ($1.38m, €1.12m) saw the UK taxman take 2,100% more in 2016/17 year than in the 06/07 tax year, when the allowance was £1.5m.
The tax charge for exceeding the LTA depends on how the income is taken. It is either 55% if taken as a lump sum or 25% if it taken as income.
While the lifetime allowance is meant to be a tax on the rich it, in fact, captures a lot more people into its net, OMW said.
Breaching the LTA is a very real possibility for substantial parts of the population, the insurer warned.
Staggering growth
In 2016/17, the government collected £110m from 2,410 people who were over the lifetime allowance.
Ten years ago, the number of people impacted by the LTA was 210, representing an increase of 1,047% over that period.
Between 2015/16 and 2016/17, there was a 40% increase.
Not just the top 1%
UK taxpayers should not make the mistake that the LTA is “just a concern for the top 1%”, as it would need to go over £4.5m to impact just the super-rich, warns OMW pension specialist Ian Browne.
“On the outset, a lifetime allowance of at least £1m seems completely reasonable. Once they hear such a large figure people are likely to tune out, convinced it will have nothing to do with them. This underestimates the power of compounding interest, investment, tax-free growth and continual pension contributions.
“As a long-term investment, what might seem like a modest amount, could exceed the allowance by the time you start to withdraw.”
Browne emphasised the importance of planning ahead and making sure that allowances; such as capital gains tax, the dividend allowance and Isas, are used to the best of their ability.
“Once you have maximised your other allowances, offshore bonds will help you continue to save in a tax efficient environment. Together, these all form part of your overall retirement plan. It’s also worth remembering that your spouse or partner will also have a lifetime allowance and so it may be worth investing in their pension rather than your own.
Inheritance tax
Passing on a pension can be a more tax efficient vehicle when it comes to inheritance tax (IHT), he added.
“It’s also worth considering if you want to fund your pension to pass it on to a loved one. You can nominate a beneficiary through an expression of wish form and this person can draw amounts of your pension.
“Even if the amount is in excess of LTA, it will be more tax efficient than paying inheritance tax. Plus, the amounts from your pension do not contribute to your beneficiaries’ lifetime allowance.”
Individual protection
“For those who are already approaching the LTA, they should check if they are eligible for fixed or individual protection 2016,” Browne added.
“Individual protection is only for those who had savings of at least £1m in April 2016, when the allowance was lowered from £1.25m to £1m. The protection allows savers to retain the lower of your pension value at April 2016 or £1.25m.
“There is no minimum pension value required for fixed protection, which also allows you to keep the £1.25m allowance. But making any new pension contributions after 5 April 2016 voids the protection and your allowance will go back to £1m,” he cautioned.
