Fantastic stats on flexible payments and the lifetime allowance

Trendspotting

It’s well documented that the pension flexibility changes introduced on 6 April 2015 brought in new benefit options for defined contribution funds such as flexi-access drawdown and uncrystallised funds pension lump sum as well as revised rules for the payment of small lump sums. As HMRC described it, ‘individuals aged 55 and over can access their defined contribution pension savings as they wish, subject to their marginal rate of income tax.’ 

At the time, there was much talk about people being able to withdraw their pension funds to spend on extravagances not related to helping them live within their means in retirement, with Italian sports cars being an iconic symbol of what retirement funds could theoretically be spent on. 

Accelerate forward three years and, while we’re unsure if sales of Italian sports cars have increased in the UK since 2015, HMRC’s latest quarterly update on Flexible Payments from Pensions (PDF)(Opens new window) does highlight an increasing number of flexible payments being made over the same period. 

For Q1 2018, the report shows that 500,000 taxable payments were made to 222,000 individuals, with a total value of £1,697m. The figures for Q1 2017 were 381,000 payments, to 176,000 individuals, totalling £1,590m. That’s to a 31% increase in the number of payments in 12 months. It helps when advising clients about their retirement options, that you understand the detail behind each one so that you can provide a solution perfectly suited their needs. On our Pensions Technical Zone, you can find frequently asked questions (FAQs) on:

Whilst these cover each option based on the relevant HMRC guidance, it’s worth bearing in mind that not all products will offer the full range of pension flexibility options in practice. 

On a related theme, HMRC have recently compiled statistics on lifetime allowance charges and fund protection. They were issued in response to a Freedom of Information request made by Retirement Advantage (thanks to Retirement Advantage who have kindly shared the request and response with us). The information released highlights several trends and themes: 

Number of people paying a lifetime allowance charge

  • There’s been an increase in the number of people paying a lifetime allowance charge each tax year from 210 in 2006/7 to 2,410 in 2016/17, representing an increase of more than 1,100%.  The most marked increases have taken place in 2012/13, 2015/16 and 2016/17, coinciding with the reductions in the lifetime allowance that have taken place since 6 April 2012.
  • More people are now paying a 25% tax charge on income than the 55% on a lump sum. This trend noticeably began in 2013/14 and possibly highlights that there is more active planning taking place for cases where a charge will apply.

Amount of tax collected

  • The amount of tax collected shows stepped increases since 2011/12, again coinciding with the reductions in the lifetime allowance since 6 April 2012. The total tax take in 2016/17 of £110m is more than five times the figure of £20m in 2011/12 and 2012/13. More significantly, there is a noticeable upward trend in the past three years.

Number of people applying for fund protection

  • There’s been increased activity in the number of people applying to HMRC for fund protection from 2011/12 onwards, with a significant jump taking place in 2016/17. This confirms that the reduction to a £1m lifetime allowance in 2016/17 has brought the lifetime allowance into scope for many more people.

The lifetime allowance statistics show that a subject you may only have encountered in exam coursework is now being seen more and more in real-life situations. Although the numbers affected by the lifetime allowance may still be small compared to the overall number of UK pension savers, it’s a subject you may need to become more familiar with on an ongoing basis. 

Not only could you see clients close to or above the standard lifetime allowance (£1.03 million in 2018/19) but also ones who have one of the various forms of fund protection that have been introduced since 6 April 2006. It helps knowing how and when benefits are tested against the lifetime allowance, how any excess is dealt with, what happens when benefits are taken in stages and what fund protection options currently exist. 

Again, we have some useful FAQ webpages on our Pensions Technical Zone to refer to on:

Make sure you save our Pensions Technical Zone as one of your favourites so you can keep up to date on all things pensions. Stats all folks!