WHEN it was introduced by the Labour Government in 2006, the lifetime allowance was supposed to work as a tax on the pensions of the rich.

Initially set at £1.5 million, the allowance was meant to be the threshold at which those with very large pension pots would have to pay an extra sum into the public purse when they started to draw their pensions.

Anyone retiring with a pot bigger than the allowance pays 55 per cent on the difference if they take it as a lump sum or 25 per cent if they take it as part of their pension income.

The thing is, with the allowance rising to a high of £1.8m between 2010 and 2012 before falling back to £1m now (it will rise by £30,000 in the new tax year), it is hitting far more than just the super-rich.

Indeed, with the charge kicking in for defined benefit pensions of £50,000 a year, someone retiring after 40 years on a final salary of £80,000 could well be liable.

In that context, far from taking in just land owners and bankers, the lifetime allowance charge could well apply to many public sector works such as head teachers and doctors.

Perhaps unsurprisingly, then, figures obtained by investment business Old Mutual Wealth show the amount of cash the Government has received from the charge rocketed by 2,100 per cent between 2006/07 and 2016/17, with the reduction in the limit having a direct impact.

In its first year the lifetime allowance charge raised £5m for the Treasury from 210 individuals, with the figures rising to £110m from 2,410 individuals in the last financial year.

Yet while the lifetime allowance may be having an impact on ever-greater numbers of retirees, John Wilson of JLT Employee Benefits feels it is also a discriminatory tax that could impact on defined contribution savers far more than defined benefit ones.

“With defined benefit you can have a pension of up to £50,000 and you won’t have to pay a fine to the taxman with the lifetime allowance charge,” he said.

“If you have a defined contribution pension and want to buy an annuity that pays £50,000 a year you would need a pot of £1.6m to £1.7m so the lifetime allowance discriminates against people in a defined contribution scheme.”

For Ian Browne, a pension specialist at Old Mutual Wealth, it is not beyond the realms of possibility that ordinary workers saving into a defined contribution scheme could have to pay the tax.

“On the outset a lifetime allowance of at least £1m seems completely reasonable,” he said. “Once they hear such a large figure people are likely to tune out, convinced it will have nothing to do with them.

“This underestimates the power of compounding interest, investment, tax-free growth and continual pension contributions. As a long-term investment, what might seem like a modest amount, could exceed the allowance by the time you start to withdraw.”

Still, for the average person to have a defined contribution pot valued anywhere near £1m at retirement, they would have to save huge sums over an extended period and be blessed with exceptional investment performance. As such, no one should rely on the lifetime allowance as an excuse to put off saving for their retirements.

Indeed, according to a recent study from pensions business Aegon, the biggest saving regret among those still working as well as those already retired was delaying the point at which they started putting money aside.

Other regrets were not making a financial plan and either not joining a workplace pension or, for those who did, staying in its low-risk - and hence low return - default fund.

The message, according to Aegon pensions director Steven Cameron, is that everyone should start saving as much as possible as soon as they possibly can.

“With the state pension unlikely to provide an adequate income for most, saving into your workplace or personal pension is not something you can afford to delay,” he said.

“For many of us, it’s the most important saving pot we’ll ever have, so you want to give yourself the best chance of building it up over as a long a period as possible.

“By starting to save for retirement as early as possible, with time on your side, you have a better chance to avoid future regrets.”

Mr Wilson at JLT agreed, saying: “The secret to having a healthy pension is to start saving as soon as you can, pay as much as you can and save persistently.”