An interesting article received this morning, 28/03/2022, in our financial media.
The number of people caught by the lifetime allowance (LTA) is predicted to hit 29,757 and raise nearly £1.5bn in tax by 2025.
Canada Life’s forecast shows more people will be caught each tax year and that means the total value of charges will increase accordingly.
The LTA was introduced in the tax year 2006-2007. It is the total amount an individual can build up in pension benefits without incurring a tax charge.
At the time of its introduction, the LTA was fixed at £1.5m. While it has been increased in the following tax years, the LTA has been constantly reduced since 2012-2013.
The last tax year on record is 2019-2020 when the LTA was £1.055m. In that period, it affected 8,510 people and brought the government £342m in taxes.
Lifetime allowance from its introduction until tax year 2019-2020
| Tax year | LTA | Total individuals affected by LTA | Total value of charges £m | YoY increase in individuals | YoY increase in total charges |
| 2006-07 | £1.5m | 450 | 6 | ||
| 2007-08 | £1.6m | 610 | 14 | 36% | 133% |
| 2008-09 | £1.65m | 830 | 24 | 36% | 71% |
| 2009-10 | £1.75m | 890 | 32 | 7% | 33% |
| 2010-11 | £1.8m | 1,180 | 37 | 33% | 16% |
| 2011-12 | £1.8m | 1,270 | 46 | 7% | 24% |
| 2012-13 | £1.5m | 1,680 | 60 | 32% | 30% |
| 2013-14 | £1.5m | 2,460 | 97 | 46% | 61% |
| 2014-15 | £1.25m | 3,100 | 104 | 26% | 7% |
| 2015-16 | £1.25m | 3,570 | 159 | 15% | 53% |
| 2016-17 | £1m | 5,000 | 202 | 40% | 27% |
| 2017-18 | £1m | 7,040 | 269 | 41% | 33% |
| 2018-19 | £1.03m | 7,130 | 283 | 1% | 5% |
| 2019-20 | £1.055m | 8,510 | 342 | 19% | 21% |
Source: Canada Life
The total value of charges from the LTA has increased every year since the introduction of LTA.
Canada Life technical director Andrew Tully told Money Marketing: “Over the last five years, it has gone up on average by 28% a year.
“If we assume it keeps growing up the same rate, in a few years’ time, we will get to about one and a half billion pounds.
“It starts to get quite interesting from a government point of view and this is only going to go in one direction.”
Estimated figures for the lifetime allowance until tax year 2025-2026
| Tax year | LTA | Total individuals affected by LTA | Total value of charges £m |
| 2020-21 | £1.0731m | 10,484 | 437 |
| 2021-22 | £1.0731m | 12,917 | 559 |
| 2022-23 | £1.0731m | 15,913 | 714 |
| 2023-24 | £1.0731m | 19,605 | 912 |
| 2024-25 | £1.0731m | 24,154 | 1,166 |
| 2025-26 | £1.0731m | 29,757 | 1,490 |
Source: Canada Life
As more people have defined contribution pots, Tully warned that more and more people will potentially have to take the LTA in consideration as they move toward retirement.
Tully also urged advisers to inform their clients using drawdown about a potential second tax charge when they turn 75.
He said: “When you take your benefits, it will be tested against a lifetime allowance and there might be a tax charge.
“But if you use drawdown, there is also a second tax charge at age 75.”
If an individual went into drawdown 15 years ago at the age of 60, the government will look at their pension benefits again.
It will measure the growth between the moment this individual went into drawdown and against the current LTA.
Should the amount exceed the limits of the LTA, the individual will have to pay a tax charge.
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Tully said: “That is an area where advisers need to be talking to their clients.
“It is probably not the worst tax charge to face because it means you have got a really nice pension pot and it has grown quite nicely.
“But clients should be aware of it. Clients are going to be upset if suddenly a big tax charge hits them and they did not know anything about it.”
Comment
This LTA tax charge is one of Rishi’s ‘stealth taxes’ in its current format. The Lifetime Allowance has been frozen for 5 years as outlined in the table above.
From my point of view, if you are paying this particular tax, it means that you have got a good level of pension benefits. That’s a really positive position to be in.
You have a variety of different strategies to deal with this Lifetime Allowance tax, it depends on your circumstances, needs and objectives to determine the right strategy for you.
The additional revenue raised will help the State now given our current economic situation.
Steve Speed
28/03/2022