Contributions into personal and stakeholder pensions — which includes workplace pensions — increased by 12 per cent between the 2018/19 and 2019/20 tax years, according to the latest HMRC figures
The annual average contribution per member had increased from £2,000 to £3,300 over this period. This is £600 more than a £2,700 paid into these schemes in 2017/18. Employer contributions now account for 65 per cent of these total payments.
While contributions have increased the number of people paying into a pension has remained constant at 9.4m. HMRC figures show that the gross pension tax relief rose from £38.2bn to £41.3bn in 2019 to 2020. At the same time, tax paid on payments from occupational and personal pensions also increased — to £19.2bn from £18.7 billion in 2018 to 2019. As a result the estimated net cost of pension tax relief to the Treasury has increased to £22.1bn, from £19.5 billion in 2018/19.
While this is broadly positive, and shows the success of the AE regime, the HMRC figures also show that there has been a rise in the number of people exceeding various pension allowances and as a result potentially being hit with tax charges.
HMRC figures show there was a 15 per cent rise in the value of contributions made over the annual allowance between 2018/19 to 2019/20 to £950 million. In total 42,350 taxpayers exceed this allowance, giving an average payment over the annual allowance of £22,432. The total value of annual allowance charges was up 20% per cent to £253 million.
Lifetime and Annual Limits
There was a 21 per cent increase in the value of Lifetime Allowance charges reported to £342m, as strong investment returns pushed many people pension’s pots beyond this limit.
HMRC said that reductions in the annual and lifetime pensions tax allowances since 2010 have resulted in a significant increase to 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.
In addition nearly 300,000 more pension savers became subject to the complex Money Purchase Annual Allowance rules in 2021 by starting to access pensions flexibly.
Stephen Lowe, group communications director at retirement specialist Just Group says: “Nearly 1.9 million pension savers have become subject to the onerous MPAA rules in the seven years since the pension ‘freedom and choice’ reforms, including 292,000 during 2021.
“These rules impose tax charges on those whose total contributions to a defined contribution pension exceed £40,000 a year. It sounds a lot but is only about £266 a month for a basic-rate taxpayer and £200 a month for a higher-rate taxpayer, including both their own and any employer contribution.
“That might not be a problem for people giving up work. But early access to pensions is now the norm and those who don’t intend to retire but take even one flexible payment, perhaps to tide them through a sticky patch for their finances, are then forever subject to the MPAA which could prevent them from catching up on their retirement savings later.”
However the HMRC figures show there was actually a modest decrease (2 per cent) in the amount withdrawn from pensions between 2020 to 2021. HMRC says this was likely to be because people saving money through being at home.
These drawdown figures, which are for the more recent years, show there was however a 19 per cent increase in flexible withdrawals from pensions between 2020 and 2021, perhaps as a result of life opening up after lockdowns.
Between April and December 2021, £8.3bn was withdrawn from pensions flexibly, up from £7bn withdrawn in the same period a year earlier. The average amount withdrawn per individual between April and December 2021 was £12,800.
Becky O’Connor, head of pensions and savings at Interactive Investor, says: “People and their employers are contributing more to personal pension schemes and therefore benefiting from more tax relief through working life, which is a good thing.
“However the flipside of this apparently positive picture, particularly for higher earners, or those drawing an income or approaching retirement, is the risk of being caught by the snares of annual and lifetime allowance charges.”
These allowances have been frozen for the life of this Parliament, which will mean potentially more people being cause by these limits in future.