HMRC work under the assumption that pension providers and individual taxpayers will monitor how much of their lifetime allowance (LTA) they have used. They don’t track this themselves, which means the Tax Office do not inform you if you have gone over the limit into the taxable pension savings bracket.
What is the pension lifetime allowance?
The lifetime allowance is the amount you can save towards your pension, during your entire working life, and still benefit from pension tax relief.
Currently, this limit is £1.005 million. Once you save over this amount, income tax is applicable. This could be at a rate of 25%, if you take it as income. Or it could be at a rate of 55%, if you take it as a lump sum.
How many people does this really affect?
It is a huge sum that is unattainable for the average taxpayer. But it is reported that 4,500 people were over their LTA maximum in the last tax year. More than you may have initially thought.
The insurance company Royal London think that there could be as many as 1.25 million people that fall into this category. For them, this could result in a shock tax bill in the future. If you don’t know you should be paying additional tax, then you can’t send it to HMRC. Therefore you are possibly looking at financial penalties for not declaring taxable income and missing payment deadlines. It is important that people know to check their situation in order to avoid these substantial fines.
How do you know how much LTA you have used up?
If you are fortunate enough to be in this category, you need to check your LTA position. You get an annual statement from your pension provider, which should include the amount of LTA you have used. This will be shown as a percentage of your available total.
Why don’t HMRC keep track of this?
Considering that there is the potential to miss out on tax here, it may seem strange that HMRC do not monitor LTAs and inform people when they stray over the threshold.
As head of policy at insurer Royal London, Steve Webb, says: ‘Most people would imagine that in this digital age, HMRC would keep records of all the pensions we take and would tell us if we go over the lifetime limit. But it turns out HMRC are relying on us to do that job.’
HMRC response is simple: ‘The majority of pensions will never result in a LTA charge. Therefore there is not a requirement for members and scheme administrators to report the amount of the LTA that has been used up.’
For them, it’s a simple numbers game. There are so few people that end up over their LTA that it’s not an efficient use of HMRC resources to keep tabs on them.
There are two main messages here. Firstly, most of us will never need to worry about this, as the £1.055 million threshold is largely unobtainable. Secondly, if you are in this financial position, you need to take full responsibility for monitoring your LTA usage in order to avoid hefty tax bills down the line.