Tax man clobbers workers for too much pension saving
Chris Ferguson
Raising and deploying capital in the real estate sector. From luxury Dubai property to UK Social housing. Interested to speak with Fund managers and family office CIO's.....
Watch out if you save too much for retirement because the tax man is clobbering diligent investors. The lifetime allowance is the amount of cash anyone can save into a pension. The current limit is ￡1 million and the limit increases in line with the cost of living each year.
Anyone breaking the saving limit pays a tax penalty of 55% on the amount over the cap. An increasing number of savers are paying the pension penalty, according to figures from HM Revenue and Customs (HMRC). In the 2015-16 tax year, when the cap was ￡1.25 million, HMRC grabbed ￡126 million from just over 1,500 savers – a jump of close to two thirds over the ￡78 million paid by 1,482 savers a year earlier.
Hundreds penalised
The figures also revealed that 449 pension savers paid the 55% tax charge in 2015-16, and another 1,100 had to hand over a 25% penalty for withdrawing savings of more than the lifetime allowance as income. Critics point out that a ￡1 million penalty pot pays a pension of around ￡50,000 a year, which is an amount many middle-earners can expect for retirement and far short of the pay-out many in the City and industry would expect.
“I think it’s hitting middle England and they don’t realise it. It’s going to hit a lot of public servants and I think it’s really unfortunate. I think it should be removed because it’s detrimental to the whole retirement message and the situation makes it so complex,” said Michelle Cracknell, chief executive of The Pensions Advisory Service. She called for scrapping of the lifetime allowance earlier this year.
Cracknell observed the cap was hitting public servants who could not avoid penalties because they could not control the growth of their funds.
QROPS solution for expats
Expats have a solution with a Qualifying Recognised Overseas Pension Scheme (QROPS). If they can see their fund is about to breach the lifetime allowance, they can shift their retirement cash to a QROPS. Once in a QROPS, the fund can grow in excess of the lifetime allowance beyond the reach of HMRC, as the tax man can no longer demand penalties.
Unfortunately, the government has blocked this escape route for public and civil servants by ordering that their pensions cannot be transferred. However, public or civil servants already transferred and other pension savers with concerns about the lifetime allowance and tax penalties can still switch.
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8 年I doubt many people would pay 55% as only applies to lump sums on the excess over the LTA. Those who have a decent financial adviser will be avoiding this with good long term planning. Many public sector workers will be affected given commutation factors applied and will get reduced initial pension incomes as a result. The are of course transitional protections in place which should be considered. I do however think a lifetime allowance excess charge would be a nice problem to have.
Financial Services Contractor
8 年As much as I sympathise with those from Middle England with large pension pots, this must be seen as the flip side of the benefit cap coin. we are not quite "all in this together", but I suspect that the vast majority have little sympathy with those who receive more in benefits than they themselves earn. I suspect that they are equally unsympathetic for those whose pensions are twice their employed income. Those in the private sector, who are paying for unfunded public sector promises, are unlikely to shed many tears for the pensions of senior civil servants when their own employers don't offer anything equivalent.