Are you under the lifetime allowance?

Over the last few years, the government has steadily been reducing the lifetime allowance the amount you're able to accumulate tax-free in your pension. Any savings over the lifetime allowance are taxed at a punitive rate of 55% and it was always clear that as this limit came down, the Treasury was netting significantly more tax. Now figures obtained by stockbroker AJ Bell through a Freedom of Information request make it clear quite how much difference the changes have made.

During the 2010/2011 tax year, the taxman collected £31.5m in charges from savers who were over the limit. This rose to £82.3m in 2013/2014, before dropping to £79.5m in 2014/2015. Total proceeds in the past five years have been almost £290m, while the number of savers caught by the tax each year has more than doubled, from 773 to 1,685.

Many more people are likely to be affected in future, after the lifetime allowance was cut to just £1m in April (it was as high as £1.8m five years ago). The Treasury downplays the impact of this by saying that 96% of people currently approaching retirement have a pension worth less than £1m. However, if you consider that there are roughly 11.5 million people approaching retirement aged between 50 and 65, at least 460,000 could be affected.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

In addition, since the lifetime allowance limit seems more likely to be cut again than raised in future and is certainly unlikely to be increased in line with inflation the number of savers who ultimately reach the limit may well be higher. If you're worried this may affect you, the first step is to get a pension valuation.

If you're in a defined contribution scheme, check your annual statement. If you're a member of a defined benefit scheme, multiply your anticipated retirement income (which should be in your paperwork) by 20 for an approximate result. For example, if you're hoping to retire on an income of £50,000 a year, your pension would be valued around the £1m mark.

Those who are already at the £1m limit can currently opt for "fixed protection" or "individual protection", which maintains their lifetime allowance at the higher limit of £1.25m that applied until April (in exchange for curbs on future contributions). If this may benefit you, it's sensible to seek financial advice on whether you should apply.

For those who are not yet near the limit, but anticipate that they are likely to accumulate a large pension, it's worth considering other ways to save tax-efficiently, such as paying part of your contributions into an individual savings account (Isa) rather than a pension. If you do this, you'll miss out on tax relief on your contributions, but there's no current limit on how much you can accumulate in an Isa and withdrawals will be tax free.