The lifetime allowance is the maximum you can save into a pension in total, while still qualifying for valuable tax breaks.
In March, YourMoney.com reported a 40% rise in the number of people who fell foul of the rules after the allowance was cut in April 2016.
The charge for exceeding the limit depends on how benefits in excess of the maximum are taken; 55% for a lump sum or 25% for regular income.
Figures from Old Mutual Wealth revealed 2,410 people in the UK went over their lifetime allowance during the 2016-17 tax year.
This resulted in the UK Government collecting £110 million, an increase from 2015-16 when 1,610 people were caught out by the rules and paid an extra £80 million in tax.
The allowance cap has fluctuated between £1m and £1.8m and £1m over the past decade.
For the first time since April 2010 the government has increased the limit, by £30,000 to £1.03m.
Although this increase isn’t huge, it will provide some relief to those currently on the threshold of exceeding the allowance and mean a saving of up to £16,500 for those with large funds.
A lifetime allowance of at least £1m seems reasonable, however, a growing number of taxpayers who have been responsible and saved for retirement are being caught by this super tax trap.
For example, the capital value of deferred pensions in final salary schemes and the high cash equivalent values currently being offered to members has resulted in people unexpectedly breaching or getting very close to the limit, often due to poor awareness.
If we were to look at a 35-year old earning £57,000 a year, with total pension contributions, including employer contributions, equalling 15% of their salary, they would end up exceeding their lifetime allowance by the time they are 70.
It’s wrong to assume the allowance is a concern only for high earners as it would need to increase to more than £4.5m if it were to affect only the top 1% of the population.
As the government continues to restrict tax relief on pensions, more people will find it is not tax-efficient to save more into their pension, either in a given year or over a lifetime.
It is vital for people to plan ahead to make the most of pensions and avoid paying more tax and alternatives are available. The annual individual savings account (Isa) allowance increased to £20,000 from April 2017 and there are also other niche tax-efficient schemes.
Our advice is to take full advantage of Isas and your capital gains tax allowance.