Britons warned of charges following ‘huge increases’ in pension savers being ‘caught out’

Financial expert gives advice on reducing risk on pensions

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People looking to save for their retirement must be careful, as exceeding their Annual Allowance (AA) which is a standard £40,000 could see them rack up charges. Almost £1billion in pension contributions were above the AA limit between 2019 and 2020, leading to total charges to over £250million in charges being doled out.

From 2019 to 2020, 42,350 taxpayers reported pension contributions exceeding their AA through Self-Assessment and the total value of contributions reported as exceeding the AA was £950 million between 2019 to 2020. This represents an increase from £820 million in 2018 to 2019 and £910 million in 2017 to 2018.

As a result, 21,410 AA charges were reported by schemes. The total value of AA charges reported by schemes for tax year 2019 to 2020 was £253 million, a 20 percent increase from £210 million reported for 2018 to 2019.

There has also been an increase in people exceeding their lifetime allowance. 8,510 Lifetime Allowance (LTA) charges were reported by schemes in 2019 to 2020 and the total value of LTA charges reported was £342 million. This is a 21 percent increase from £283 million in 2018 to 2019.

The Government has said reductions in the annual and lifetime pensions tax allowances since 2010 have contributed to a significant increase in the number and value of charges. In particular, the introduction of the annual allowance taper for high earners in 2016 and the reduction of the money purchase annual allowance in 2017 has been a factor.

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Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown has had her say on the surge in charges being issued to pension savers, and she has concerns about the complexity of the personal pensions landscape.

She said: “The healthy pre-pandemic picture for personal pensions shows the numbers of savers and contributions on the up. However, an already highly complex system is catching out increasing numbers of people as the amount of annual and lifetime allowance charges continue to soar.

“Annual allowance charges grew by around 15 percent compared to the previous year and the value of tax charges is up around nine-fold in the past five years alone. Auto-enrolment has done much to involve people in pension saving but we must ensure this good work is not being undone by needless complexity that results in unexpected tax charges and disengages pension savers.

“These huge increases show people are increasingly being caught out by a system that includes not only the standard £40,000 annual allowance but also a tapered and money purchase version as well.”

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However, the data did reveal some positive signs with regard to pension savings, as more and more people take extra consideration when it comes to planning for retirement.

In 2019 to 2020, £31.3billion was contributed to personal pensions, up from £27.9billion in 2018 to 2019. The total value of contributions to personal pensions has risen over the last three years by an average of 11 percent per year.

The annual average contributions per person have increased from £3,000 in 2018 to 2019 to £3,300 in 2019 to 2020, and this is £600 more than the £2,700 average in 2017 to 2018

People have generally been putting more money into their pension pots over the last decade plus, as contributions are now £10.4billion higher than the peak before the financial crisis in 2007 to 2008.

Auto-enrolment has also had a part to play in the increase of pension contributions for Britons, with the proportion of payments contributed by employers rising from around 10 percent in the early 1990’s to a massive 65 percent in 2019 to 2020.

These rises in employer contributions are very likely driven by the introduction of auto-enrolment in 2012.

Plenty of people have been taking advantage of the potential benefits of tax relief through pension saving, as gross pension tax relief in 2019 to 2020 is projected to be £41.3billion, up from £38.2billion in 2018 to 2019.

These estimates cover all private pensions, not just personal pensions, and also include the cost of tax relief on contributions and tax relief on investment growth of assets held by pension schemes.

Tax paid on payments from private pensions (occupational pensions and personal pensions) has increased to £19.2billion in 2019 to 2020 from £18.7billion in 2018 to 2019. The estimated net cost of pension tax relief has increased to £22.1billion, from £19.5billion in 2018 to 2019.

Elsewhere, there has been a small reduction in people flexibly accessing their pension. In 2020 to 2021, £9.6billion was withdrawn from pensions flexibly, which represents a two percent decrease year-on-year from £9.8billion withdrawn throughout 2019 to 2020.

The total value of flexible withdrawals from pensions since flexibility changes were made in 2015 has exceeded £45billion.

The number of members contributing to a personal pension has remained at 9.4 million in 2018 to 2019 and in 2019 to 2020. Since the introduction of auto-enrolment in 2012 to 2013, there has been a steady increase in the number of members contributing to a personal pension, up from 8.4 million in 2012 to 2013.

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