Pension savers unscathed in Sunak’s Statement – but thousands at risk of 55% tax charge

Budget 2021: Sunak announces pension lifetime allowance freeze

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Many experts predicted Mr Sunak would target pension benefits or tax relief this week, but savers managed to escape unscathed. Despite this, individuals should be aware existing rules could still hit their pockets hard, especially if these are breached. 

New HMRC data has shown there was a 15 percent rise in the value of contributions made over the annual allowance between 2018 and 2019 and 2019 to 2020 to £950million.

This was shared between 42,350 taxpayers, giving an average payment over the annual allowance among this group of £22,432.

The total value of annual allowance charges soared by 20 percent from £210million in 2018/19 to £253million in 2019/20.

Another key element to consider is the Lifetime Allowance (LTA) which savers will have to stick to when it comes to putting away money for retirement.

The LTA places a limit on the amount people can save in total while still enjoying tax-free benefits.

The current savings threshold is £1,073,100 – which seems hefty, but more people could exceed this than perhaps commonly thought.

This is particularly the case given inflationary pressures and interest rate rises, which could see the value of funds soar.

The Chancellor also froze the limit at this rate until 2026 in the Spring Budget, meaning exceeding it is more likely.

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Those who do go above the savings limit could be subject to a 55 percent tax charge for the privilege.

Understandably, this is something most individuals will want to avoid.

But unfortunately, data has indicated more people are already propelling across the limit.

There was a 21 percent increase in the value of Lifetime Allowance charges reported in 2019 to 2020.

This meant an increase from £283million in 2018/19 to £342million in 2019/20.

Continual investment growth and the frozen allowance which remained untouched by the Chancellor means the issue may get worse.

This was highlighted by Peter Glancy, Head of Policy at Scottish Widows, who said: “Normally, investment returns counter the effect of inflation. However, when you face a tax penalty of 55 percent when your investments exceed the LTA, you could actually be fined if your assets keep pace with inflation. 

“This clearly doesn’t make any sense and the Government needs to consider its decision to freeze the LTA.”

HMRC said reductions in the annual and lifetime pensions tax allowances since 2010 have resulted in a significant increase to the number and value of charges.

Becky O’Connor, Head of Pensions and Savings at interactive investor, said: “People and their employers are contributing more to personal pension schemes and therefore benefiting from more tax relief through working life, which is a good thing.

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“However the flipside of this apparently positive picture, particularly for higher earners, or those drawing an income or approaching retirement, is the risk of being caught by the snares of annual and lifetime allowance charges.

“It is a classic case of ‘giveth, and taketh away’, only this plays out over the decades-long period of someone’s working life and then retirement years.”

An HM Treasury spokesperson recently told about the Lifetime Allowance.

They said: “Maintaining the lifetime allowance at its current level allows savers to continue to make significant amounts of pension savings tax-free.”

“Overall, 92 percent of individuals currently approaching retirement have a pension pot worth less than the lifetime allowance, so will not face a lifetime allowance charge, while the median pension pot for individuals approaching retirement is around £150,000.” 

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