The amount of tax charged for people breaching the UK's Lifetime Allowance has soared to £283m, a 6% increase from £269m in 2017 to 2018 representing the single biggest amount clawed back in one year since the lifetime allowance was introduced in 2006, according to updated Annual Allowance and Lifetime Allowance pension figures published today (30 June) by HMRC.

They show that both Annual Allowance (AA) and Lifetime Allowance (LTA) tax charges have sharply risen over the past few years.

The total value of AA charges reported in 2018 to 2019 was £209m, a 71% increase from £122m in 2017 to 2018.

Ian Browne, pensions expert at Quilter said; "This data adds to the argument that we need to take a very careful look at the current pension tax system for the public sector and see whether it is still fit for purpose.

While some welcome tweaks to this notoriously complicated area have been made over the past few years they amount to a sticking plaster and a total rethink is necessary."

He added: "Similarly, the amount of tax charged for people breaching the Lifetime Allowance has soared to £283m, a 6% increase from £269m in 2017 to 2018 representing the single biggest amount clawed back in one year since the lifetime allowance was introduced in 2006.

"This new data will represent an enormous worry for pension savers throughout the country who have saved for years to then be taxed for their good behaviour.

"Recent rumours around the lifetime allowance threshold dropping further to £800k or £900k will mean even more pension savers are caught by the tax charge. Pensions by their very nature are a long-term product and its unfair of the government to constantly move the goal posts."

Browne said the effect of the Lifetime Allowance charge can be mitigated by either avoiding the charge, deferring part of the charge or potentially reducing it, and which route will depend on the individual circumstances of the client.

However, this is a complicated area of the pensions landscape and without professional financial advice someone could be facing a 55% immediate tax charge on the excess.

He explained what to do if clients are worried about breaching the LTA. 

"At present, as a rule of thumb, anyone who is approaching retirement with a pension valued greater than £500,000 should carefully consider whether they will breach the LTA.

However, this will depend on the age of the person and those at the older end of the spectrum may be less worried than younger people who have more time for growth and contributions to tip them over the LTA.

Once someone has retired, if they enter drawdown and withdraw little or no income, the long term investment performance of their drawdown fund will most likely mean that there will growth that will need to be tested against their remaining lifetime allowance at age 75."

He further said: "If after consideration someone feels that it is likely that they will breach the LTA they may wish to decide whether they contribute as much to their pension or whether they instead contribute to their partner's pension instead.

Similarly, the tax is designed to move the tax advantages of a pension into a neutral position for higher earners therefore someone may choose to siphon the money into other more tax efficient investments like an ISA instead.

Savers may also look to apply for Fixed Protection 2016 (FP16), which fixes your Lifetime Allowance at £1.25m. However, once someone has qualified for this protection you can no longer build up your pension except in limited circumstances. Anyone looking to apply for these protections should seek financial advice."

As to how the rumoured drop to the lifetime allowance will impact savers, he argued that while even pension pots of £800k or £900k sound like a very large pot of money to many, investment growth and compound interest can mean that the new LTA thresholds can be easier to hit than people may think particularly for those in public sector schemes.

Quilter's calculations show that someone with a £625k or a £700k pension pot and are five years away from retirement could be forced to hand over some of their hard-earned cash to the taxman if the thresholds are reduced to £800k or £900k respectively. This is assuming 5% net investment growth and doesn't take into account any personal or employer contributions which will substantially speed up growth.

According to another leading expert, Andrew Tully, technical director at Canada Life: "Today's figures from HMRC reveal that the impact of the money purchase annual allowance and tapered annual allowance hit savers hard in the 2019/20 tax year.

While the value of contributions exceeding the limit has actually dropped slightly, the cost of charges has increased by 71%. Jumping to £209 million in 2018/19 from £122 million the previous year.

Even something which sounds as simple as an annual allowance is complicated by the fact we have three different limits - a standard allowance, a very low allowance for those who have flexibly accessed their benefits, and a fiendishly complicated position which reduces the limit for higher earners.

This complexity means many individuals may be unintentionally caught by the AA, although this should ease in more recent tax years due to the rise in the tapered annual allowance threshold.

"We have also seen a 6% increase in savers being caught out by the Lifetime Allowance, with the tax now bringing in £283 million compared to £269 million the previous tax year. Interestingly most savers choose to pay the tax charge of 25% and retain the money in the pension, rather than opt for the rather more salty lump sum charge of 55%."

Tully set out the details of the updated HMRC figures below:

• In 2018 to 2019, 34,220 tax payers reported pension contributions exceeding their AA through Self Assessment, paying an average charge of £23,874
• The total value of contributions reported as exceeding the AA was £817 million in 2018 to 2019, decreasing from £912 million in 2017 to 2018 and £584 million in 2016 to 2017
• The total value of AA charges reported by schemes in 2018 to 2019 was £209 million, a 71% increase from £122 million in 2017 to 2018.
• In 2018 to 2019, 7,130 LTA charges were reported by schemes through AFT returns. The total value of LTA charges reported by schemes in 2018 to 2019 was £283 million, a 6% increase from £269 million in 2017 to 2018.
• 80% of savers choose to pay a 25% LTA charge, preferring to leave the money in the pension scheme, rather than withdraw as a lump sum (a 55% charge)
• Tapered annual allowance (introduced in 2016) will continue to hit high earners in tax year 2019/20 as the adjusted income threshold remained at £150,000 in that year. As the taper threshold was increased significantly from April 2020 it should reduce the impact of the AA for some individuals in more recent tax years but we will need to await future statistics to show by how much