Pension warning as more families hit by 55% tax due to Rishi Sunak changes

Pension: Expert gives advice on preparing for retirement

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The lifetime allowance restricts the amount Britons can save put into their private pension pots during their life. The limit has traditionally increased each year with inflation, but will now stay the same for the next five years.

The Chancellor Rishi Sunak has frozen the lifetime allowance until the 2025/26 tax year, a move which is expected to raise an extra £1billion from pension savers.

This is because people who exceed the limit could be hit by a massive 55 percent tax charge from HMRC.

It is estimated that 1.6 million are set to pay this tax charge due to the decision to keep the threshold at the same level.

This would be an increase from 1.2 million, meaning an additional 400,000 could be penalised for having too much set aside as retirement savings.

Due to the steep penalties for exceeding the limit, some campaigners have called for the lifetime allowance to be scrapped in its entirety.

The allowance has decreased in recent years, as a decade ago the lifetime allowance was set at £1.8 million, but is now £1,073,100.

This may seem like a very large amount, but a surprising number of Britons could risk brushing up against the limit, and not all of them are higher earners.

Indeed, even younger savers with relatively small pension pots today could also be caught out due to interest on their savings.

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Steven Cameron, Pensions Director at Aegon said: “The allowance has been dramatically cut over the last decade and is now frozen at £1,073,100 till 2026.

“The Chancellor highlighted that higher inflation is with us in the near term at the very least which will further erode the real value of the lifetime allowance. It’s imperative that this freeze doesn’t continue indefinitely.

“Our analysis highlights how with good investment returns, many people who are likely to consider themselves a long way from the cap at present could be caught out.

“For example, a six percent investment return over the next nine years would take someone with £686,000 today over the limit, even if they do not contribute a penny more to their savings.

“Similarly, at a more modest growth rate of four percent someone with £882,000 will breach the limit within five years.

“The lifetime allowance is effectively punishing those who have done the right thing and saved regularly over the course of their lives.

“With inflation on the rise, that punishment is greater and more wide reaching, making it an area that requires reform in the years ahead.”

Gordon Armstrong, UK Head of Personal Advice at Mercer added: “Freezing of personal allowances on income, capital gains, Inheritance Tax and Pension Lifetime allowances mean in effect a tax increase.”

The lifetime allowance freeze has prompted concern from some that the annual allowance could also be changed in the future, further impacting people’s ability to save for retirement.

Much like the lifetime allowance, the annual allowance caps how much people can have in savings at £40,000 for each year.

While this also seems to be a high threshold, many people whose income has not remained steady across their working life could be impacted by any changes to the allowance.

Kevin Mountford, savings expert and co-founder of said: “The amount of tax-free cash that people can pay into their pension each year is currently set at £40,000, but is now potentially being lowered to £30,000/£20,000 (but not yet confirmed by the government).

“Whilst this may only affect people who make very large pension contributions, it could also affect people whose income has not been relatively fixed throughout their working life.”

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