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An individual’s lifetime allowance (LTA) is the maximum amount they can draw from either their workplace or personal pensions without paying additional tax. As it currently stands, the threshold for this tax amount is at £1,073,100 but this looks set to potentially change. Mr Hunt is reportedly considering raising the lifetime allowance limit for pensions in his position as Chancellor.
In his Spring Budget, Jeremy Hunt is likely to announce pension reforms which may include reducing the number of people that are hit with a 55 percent tax charge.
Currently, the allowance is due to be frozen at the current rate until at least 2026 which is dragging thousands of pensioners into paying the levy.
As well as this, the lifetime allowance has more than halved in real terms since it was introduced back in 2006.
At face value, increasing the LTA would be a boon for older households which are being hit hard by the rise in the cost of living.
Speaking to Express.co.uk, Jon Greer, the head of retirement policy at Quilter, broke down how people are “caught” by the lifetime allowance.
He explained: “Rumours have been rife that the LTA might be increased as one of the measures designed to try and get more people closer to retirement who have become economically inactive back to work.
“Even when the LTA was increasing in line with CPI [consumer price index] we saw increasing numbers of individuals impacted each year and, until the LTA is unfrozen, more and more people will get caught by its net, making it less attractive to continue working.
“While for many people breaching the lifetime allowance seems inconceivable the currently frozen threshold makes it more of a reality for many although it is something that will only impact the affluent.”
Quilter also detailed what fund value pensioners would need to have in this tax year to breach the lifetime allowance in future years.
This analysis specifically takes into account a four percent gain on investments each year for pension funds.
Notably, if someone’s fund value was £840,802 at present, they would hit the lifetime allowance in five years and would start to suffer tax charges.
If their fund value was £407,348, they would eventually reach the LTA in 30 years’ time, according to the firm.
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The retirement expert discussed the importance of people getting financial advice when it comes to looking to avoid paying extra.
Mr Greer added: “This shows that if your fund value was £840,802 today, you’d hit the lifetime allowance in five years and would start to suffer tax charges.
“It is always worth seeking financial advice if you think you might breach the LTA as while your options are limited there are some things you can do to help mitigate the charge.
“For example, some individuals may still be able to apply for fixed and individual protection 2016, which protects pension savings from the reduction of the standard lifetime allowance, when it was reduced to £1million.”
Originally, the lifetime allowance was set at £1.5million as part of a plan to simplify pensions for Britons.
It set up the maximum amount someone could reach while building up their pension tax-efficiently, and was only supposed to affect the richest in the country.
Aligned with inflation, the LTA was allowed to hit £1.8million in 2011/12, before being lowered back down to £1.5million for 2012/13.
Eight years ago, it was announced that the lifetime allowance would be cut from £1.25million to £1million from 2016/17 and tied to CPI inflation from April 2018/19 but then frozen.
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