Average UK worker may unknowingly breach £1.1 million Lifetime Allowance

Ffion White

by , PR Manager

13 June 2022 /  

13
June 2022

Couple.

New modelling from online pension provider, PensionBee, reveals that the average worker is on track to exceed the current Lifetime Allowance of £1,073,100 (1) by the typical retirement age of 64-65 in the UK (2).

This is because many workers with varying salaries may be unaware of how much they’ve saved with the aid of Auto-Enrolment, and could be at risk of triggering tax penalties of up to 55% on any pension withdrawals by breaching the Lifetime Allowance.

As expected, the youngest, highest earning workers of today are most at risk of hitting the Lifetime Allowance threshold early. PensionBee’s modelling highlights that the top 10% of 18-21 year old earners, with a salary of £21,899, could exceed the current allowance at the age of 57-58, 7 years before the typical retirement age (3). In fact, by the age of 60, this group could be expected to have a pension pot of £1,308,038, assuming they begin saving from age 18 (4).

However, this is not just a potential problem for the highest earners. Even 18-21 year old workers, with an average salary for their age group of £12,275 (5) could be likely to reach the threshold at the same time as the typical retirement age of 64-65, with an expected pension pot of £777,489 by the age of 60 (6).

Even those who begin contributing to their pension a few years later, at age 22, could face the same risks. The top 10% of 22-29 year old earners, with an average salary of £40,000 (7), are predicted to surpass the threshold 6 years before retirement, at age 58-59, ultimately, accumulating an expected pension pot of £1,157,677 by the time they reach 60 (8).

While 22-29 year olds, with an average salary of £25,997, aren’t expected to breach the Lifetime Allowance until the ages of 66-67, they could still be likely to trigger tax penalties (9). This is due to many savers tending to hold off making withdrawals immediately, and continue to contribute into their pension beyond the typical retirement age.

Romi Savova, CEO of PensionBee, commented: “While there are already sensible limits on how much an individual can pay into their pension each year, the current Lifetime Allowance limit punishes those who have saved diligently throughout their working life and contradicts the government’s message that everyone should be saving for retirement.

A much more reasonable measure would be to eliminate the Lifetime Allowance and instead focus on the current Annual Allowance, where we see far less people contributing up to the threshold as a whole.

As life expectancies increase, many workers will continue to contribute into their pension far beyond their working lives, so I would encourage all savers to keep a close eye on their contributions to avoid being penalised, while ensuring that they are saving enough to be able to enjoy a comfortable retirement.”

Appendix

Table 1: Average annual income for workers based on an average income bracket

Age Average annual income (£)
18-21 £12,275
22-29 £25,997
30-39 £32,747
40-49 £36,334
50-59 £33,945
60-69 £25,412

Source: PensionBee, May 2022, using data ONS Earnings and hours worked, age group: ASHE Table 6

Table 2: Average annual income for workers based on the top 10% income bracket

Age Average annual income (£)
18-21 £21,899
22-29 £40,000
30-39 £55,092
40-49 £63,642
50-59 £59,484
60-69 £46,945

Source: PensionBee, May 2022, using data ONS Earnings and hours worked, age group: ASHE Table 6

Table 3: Expected pot size, and age workers in the top 10% are expected to exceed the Lifetime Allowance

Age began work and pension contributions Expected pension pot size by age 60 (£) Age first expected to exceed current Lifetime Allowance
18 £1,308,038 57-58
21 £1,157,677 58-59

Source: PensionBee, May 2022, using data ONS Earnings and hours worked, age group: ASHE Table 6

Table 4: Expected pot size and age average workers are expected to exceed the Lifetime Allowance

Age began work and pension contributions Expected pension pot size by age 60 (£) Age first expected to exceed current Lifetime Allowance
18 £777,489 64-65
21 £705,049 66-67

Source: PensionBee, May 2022, using data ONS Earnings and hours worked, age group: ASHE Table 6

Footnotes

  1. Gov.uk
  2. Unbiased
  3. Office for National Statistics, based on earnings and hours worked data for ages 18-22
  4. [This figure assumes any due tax relief, and a 15% total contribution (8% auto-enrolment and 7% personal or employer contribution), and that workers aged below 22 have opted into their workplace pensions. It also assume 7% annual growth.]
  5. Office for National Statistics, based on earnings and hours worked data for ages 18-22
  6. [This figure assumes any due tax relief, and a 15% total contribution (8% auto-enrolment and 7% personal or employer contribution), and that workers aged below 22 have opted into their workplace pensions. It also assume 7% annual growth.]
  7. Office for National Statistics, based on earnings and hours worked data for ages 22-29
  8. [This figure assumes any due tax relief, and a 15% total contribution (8% auto-enrolment and 7% personal or employer contribution), and that workers aged over 22 have opted into their workplace pensions. It also assume 7% annual growth.]
  9. Office for National Statistics, based on earnings and hours worked data for ages 22-29

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