I was charged £18,000 for exceeding the pensions lifetime allowance (LTA) in November 2022 when I reached age 75. The tax regulations then changed in April 2023 and now that tax charge would not apply. I should have taken out protection but this now isn't possible due to recent contributions I made.
My pensions exceeded the LTA for reasons including investment performance and an annuity I took out in 1987. The annuity purchase was financed with an additional voluntary contribution (AVC) sum worth £34,354. I was made redundant on my 50th birthday and eligible to take a defined benefit pension based on my service to that date. However, I was also obliged to take the sum saved in the AVC as an annuity at the same time.
I didn't take a lump sum, as I intended to find another job so didn't need it, though if I had done this it would have reduced my LTA liability. I opted for a reduced initial annuity with a 5 per cent indexation. These factors and indexation over a period of 25 years meant that the annuity was worth £4,797 a year in November 2022. The indexed annuity which I chose initially paid out £1,487 a year.
I think that this is an unusual situation and the standard HM Revenue & Customs (HMRC) formula for LTA calculations of 25 times shouldn't apply. Based on the November 2022 annuity value, the LTA for the annuity would be approximately £120,000 with a resulting tax liability of £30,000. This seems to be out of proportion as I only paid £34,354 for it.
As HMRC's manual says that the LTA charge is to recover tax relief given on the pension contribution, the standard assessment criteria shouldn't apply. So is it possible to appeal against the £18,000 charge and, if so, what is the procedure? RW
Penny Cogher and Michael White of Irwin Mitchell
While a letter from HMRC informing you of an LTA charge should be taken seriously, there are avenues via which such a charge can be challenged.
You are liable due to the increased value of an annuity you purchased more than 36 years ago for £34,354. Due to the formula that HMRC applies, this has resulted in you exceeding the LTA in the last tax year and incurring a charge of £18,000.
The LTA is the amount of money an individual can keep in their pension funds without incurring a penal tax charge for having excessive pension savings. Due to the government abolishing the LTA charge this year, no charges are imposed if an individual accesses their pension savings after 6 April 2023, although tax reports on the LTA still have to be made.
However, HMRC still imposes the LTA charge on pension funds accessed before then. This creates something of an arbitrary tax differential for people.
As a starting point to challenging the charge, you should ask your annuity provider if it will allow you to re-shape your annuity in such a way that no tax charge would arise under HMRC’s formula and provide evidence of this to HMRC. This may not be possible but it's important to be able to demonstrate that it has been requested.
Following on from this, there is helpful case law from 2018 which can be quoted to HMRC as authority for it to exercise its discretion in your favour. The Tax Tribunal case of G Hymanson versus HMRC showed that HMRC has discretion to decide, in that case, whether an individual has lost their HMRC pension protection. And in that case, HMRC's decision was disputed successfully.
Although you didn't have any pension protection in place, we believe that this judgment is still helpful for illustrating HMRC’s ability – though not obligation – to exercise its discretion in cases of genuine error regarding pensions tax.
It then falls on you to articulate to HMRC why it should exercise this discretion and waive the charge, with reference to, in particular, the age discrimination element of the LTA charge. You incurred the charge because you reached age 75, so for pension tax purposes, the value of your overall pension savings had to be assessed in November 2022 rather than, for example, April 2023 when no charge would apply. However, from the perspective of the outside world, having to crystalise an individual’s pension tax position and pay penal tax on it just because an individual has reached age 75 seems arbitrary and discriminatory.
You should refer to:
- the steps taken to try to resolve the position, for instance, asking for the annuity to be re-shaped;
- the low value of the annuity as of November 2022 of £4,797 which is far less than the tax charge itself based on HMRC’s formula for determining the value of the annuity;
- excerpts from the HMRC Manual on the purposes of the tax charge and why its imposition is unfair and not justified for its intended purposes; and
- the vast and inequitable difference between the £18,000 tax charge and the original cost of the annuity of £34,354.
While you have already covered some of this in a letter to HMRC, we recommend that a further letter is sent to HMRC, together with all relevant legal authorities. But HMRC may still not waive the charge.
Richard Knight of Burges Salmon
I understand your frustration. There are often winners and losers when it comes to tax changes, and you were unfortunate in that you were only a few months short of benefiting from the change.
The LTA was first introduced in 2006 as a mechanism for limiting tax-favoured pension savings in registered pension schemes. Since then, this has been an area of law which has been particularly prone to change. Successive governments have both raised and then reduced the LTA threshold. Accompanying protection regimes, while helpful, have further complicated things and the whole area has posed uncertainty for many pension scheme members.
The most recent policy change to remove the LTA is reflective of government unease that the LTA could disincentivise people to remain in work. However, a day after the government’s announcement, the Labour Party pledged that it would reinstate the LTA if elected at the next general election. Regardless of your political views, the constantly changing landscape makes it very difficult for people to plan.
The current law makes clear that from 6 April 2023, there is no longer a LTA charge. You are frustrated because if you had reached age 75 just four months later than November 2022, you would not have incurred a charge. Unfortunately, the law is unequivocal here: for any benefit crystallisation events occurring before 6 April 2023 all current rules apply.
Your issue is in part due to the treatment of your annuity, particularly the multiplier used. However, the multiplier of 25 that has apparently been used to value your annuity is the correct multiplier. To value benefits for LTA purposes, HMRC has to use certain methods, and these include a designated multiplier such as the one in your case.
It is also important to note that the £18,000 charge will have been established by assessing the entirety of your pension savings, and not the assessment of the annuity alone.
You didn't opt for any of the LTA protections and unfortunately, it looks as though the failure to investigate protection prior to taking your pension benefits is the real issue here. I would recommend that you take financial advice, if you have not done so already, to confirm that the figures and LTA calculations are correct. If they are, there is very limited scope to launch an appeal.
A further option could be judicial review. This could very occasionally be available if HMRC has exercised or failed to exercise discretion, or it can be shown that it has acted outside its statutory "care and management” powers.
Alternatively, you can make a complaint to the Revenue Ombudsman if you think that HMRC has acted outside its charter. In our experience, though, there has only been one instance where compensation has been awarded and this did not include recovery of the tax itself. Overall, based on the information you have given, I think that an appeal is unlikely to succeed.
Unfortunately, this area is fraught with difficulty for long-term financial planning and I sympathise greatly. For others in similar situations, financial advice and considering LTA protection at an early stage would be the recommendation – particularly as further changes are expected.
