Budget 2021: Sunak announces pension lifetime allowance freeze
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His 55 percent tax on pension savings is the wrong way. It is vicious, stupid and downright cruel, but worse than that, it makes no sense.
So far, the damage inflicted by the pensions lifetime allowance (LTA) has gone under the radar, because people assume only the super rich pay it.
That may have been true when the LTA was set at £1.8 million, but it’s no longer the case today, because it has been repeatedly cut by successive Chancellors to £1,073,100 today.
This may still sound a lot but rocketing inflation is set to slash its real value even further, and more and more ordinary Britons will be punished as a result.
The only thing they have done wrong is to follow years of government advice and save money in company and personal pensions, to reduce their dependence on the State Pension and nation’s coffers.
For that, they are paying a high price.
The pensions lifetime allowance is the maximum you can save across all your pensions during your lifetime, before HM Revenue & Customs savages your money with the country’s most brutal tax.
Last March, Sunak froze the pensions lifetime allowance for five years at £1,073,100. That still sounds a lot but it’s been whittled down from £1.8 billion in recent years.
Now inflation is going to accelerate the process. The faster inflation rises, the faster the real value of the LTV will fall.
Already, 1.6 million people pay and that number is expected to jump by another 500,000 during the five-year freeze, which runs until the 2025/26 tax year.
If inflation averages five percent during that time, the LTA will drop to just £840,801 in real terms, dragging more people into the net.
People who think they won’t pay it today may soon be discover they are wrong.
Here’s why it’s so unfair.
The pensions lifetime allowance does not tax the amount you pay into your pensions, but its total value after growth.
In other words, it’s a tax on successful investors.
Another problem is that nobody knows whether they will pay it. If the stock market suddenly rockets, people who thought they were safe could be tipped over the limit without expecting or realising it.
To find out if they are at risk, savers have to work out the value of every pension scheme they have, to find out their total worth today.
They then have to make complex assumptions about investment growth and inflation, to guess how much it might be worth in future.
As a result, millions do not know whether they should continue paying more money into a pension, or put that money elsewhere.
Given the confusion, many who were in no danger of breaching the lifetime allowance may stop saving in a pension, shrinking their retirement savings.
In other words, it’s a total mess.
Everybody loses from this incompetent tax. Incredibly, so does the Treasury. As I reported on Monday, it actually drains the country of much-needed tax revenues, rather than increases them.
It would be much wiser for the Sunak to let our pension pots grow untouched, then tax them in retirement, once people start drawing their savings as income.
It would also be a lot fairer.
If Sunak is hellbent on raising more tax money from our pensions, the lifetime allowance is probably the worst way of doing it.
Let the money grow, Mr Sunak. You’ll get your pound of flesh anyway, just in a fairer and clearer way.
The lifetime allowance has to go. Then everyone wins. Sunak, the Treasury and most important of all, pension savers.
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