Insights

According to new research, 33% of people have stopped paying money into their pensions in the last 12 months and 65% of people are expecting to be able to survive in retirement on their state pension. This appears to be creating a divide within the UK with some people failing to make provision for the future, whilst others are being financially penalised for overpaying into private pension schemes and effectively squirrelling away too much.

Currently, most taxpayers are permitted to save up to £40,000 into a pension every year, tax free, without needing to pay any charges. Taxpayers who exceed this annual allowance face being taxed on the excess at their marginal rate of tax. Additional rate taxpayers face further restrictions in the amount they can save in a pension, with the personal allowance tapering away. People earning above £110,000 have an annual allowance of less than £10,000.

In the last tax year, over 26,000 savers faced penalties; a 44% increase on the previous year, representing £813m in additional pension savings. Compare this with 2007, when only 230 people breached the annual allowance for pension contributions with more generous restrictions in place.

The total value of an individual’s pension pot is now also restricted by a lifetime allowance, which is currently set at £1.055m. Any pension investments that exceed this value will incur additional taxes. Further demonstrating the ‘squirrel effect’, the numbers of people facing penalties for having a ‘supersized pension’ has also risen sharply in recent years. HMRC figures report over 4,500 pension savers being taxed for breaching the lifetime allowance, a 36% increase from the 2016-17 tax year.

In the future, these allowances look set to change again because the Office for Tax Simplification is calling on the government to revise the current rules. They suggest that different pension allowances should be available to taxpayers depending on whether they are saving into a defined contribution scheme or a final salary plan.

If you would like personal tax advice, please contact partners@rjp.co.uk