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Budget could hit millions of pension savers with tax raid on pots
Budget could hit millions of pension savers with tax raid on pots
Published on November 05, 2022 at 11:58 AM
MILLIONS of pension savers could have their pots raided thanks to a new stealth tax set to be unveiled in the November 17 Budget.
And experts have said that the move on retirement nest eggs could put people off saving into a pension at all.
The pension lifetime allowance was frozen last year in Rishi Sunak’s Spring Budget
According to The Daily Telegraph, Rishi Sunak and Jeremy Hunt have plans to extend the freeze on the pension lifetime allowance in their Budget later this month.
The pension lifetime allowance is the total amount you can save tax-free in a pension scheme.
Pensioners have to pay tax if their pension pots are worth more than the lifetime allowance. This is currently ã1,073,100.
Pension savings over ã1,073,100 are taxed at 55% if the money is taken out as a lump sum or at 25% plus your income tax rate if taken out gradually.
So for every ã100,000 above the lifetime allowance will mean pensioners will have to fork out ã55,000 in tax.
But it now looks like that freeze will be extended by another two years until 2027/28.
Steve Webb, the former pensions minister who is now a partner at LCP, told The Daily Telegraph: “When the lifetime allowance was first created it was designed to stop the super-rich creaming off too much in pension tax relief over their lifetime.
“But a series of cuts and freezes has meant that the LTA is now an issue for far more people.
“If the current freeze is extended even further, we could easily see two million people in the workforce having to start to think about capping their pension savings in order to avoid tax charges.
“Double digit inflation means that this policy has been much more brutal than first anticipated and extending the freeze for another two years would make the Lifetime Allowance a mainstream concern for literally millions of people.
“This would add unwelcome complexity to the system and could easily put people off saving into a pension at all.”;
In a normal year, the pensions lifetime allowance would usually go up in line with inflation â so this is a major kick in the teeth for pensioners.
The five-year freeze is one of a host of measures to help pay the Treasuryâs Covid-19 support bills.
By freezing the pension lifetime allowance, the Chancellor has effectively lowered the amount you can put into your pension to avoid an extra tax on the withdrawal. This has been dubbed a âraid on taxpayers.â
Shouldà inflation continue to rise, the impact will be even greater, as these allowances become even more stingy in real terms.
What does it mean for retirement?
While a figure of over ã1million may sound like a big sum, over a retirement of 30 years or more, it wonât pay very generously.
For example, the reality is, for someone aged 65, it will only buy an income of around ã26,100 a year at age 65 (increasing in line with inflation before tax).
After basic-rate tax, this equates to a monthly income of ã1,950, according to investment firm, Aegon â hardly the income of the super-rich.
The freezing of the lifetime allowance is not something that only wealthy people need to worry about, as lots of ordinary savers will feel the impact too.
Lots of those affected will be individuals who have “done the right thing”; and been diligent about saving regularly over the years â or who have benefited from good investment growth in their defined contribution pension.
Freezing the allowance will harm public sector workers such as doctors or senior teachers.
And, if the allowance remains at its current level, more and more people could find themselves dragged into having to pay the tax as their salary increases.
How much tax do I pay?
Check out the annual statements from your pension provider setting out what they expect will happen to your pension.
These can help you work out whether you are likely to exceed the allowance.
If you do go above the allowance, youâll get a statement detailing how much tax you owe. The tax will be deducted before you start getting your pension.
The way the tax applies depends on how you receive the money from your pension.
Any amount over the ã1,073,100 cap that you take as a lump sum is charged at 55%.
Any amount you take as a regular retirement income, such as purchasing an annuity or taking a regular income through a drawdown plan where the pot remains invested, attracts a charge of 25%.
What can I do if I’m approaching the limit?
If you are on your way to exceeding the lifetime limit, you need to think twice before moving more money to your pension.
As a pension saver, you are able to apply for protection that saves you from the tax.
But this means you have to stop putting any more money aside immediately. Find out more at Gov.uk.
Another option involves usingà tax-free savings such as ISAsà (individual savings accounts) as well as pensions for retirement saving.
In some very specific cases, there may be an argument for breaching the limit, but as the calculations can be complicated, itâs worth seeking independent advice.
The same applies if you are concerned in any way about the freezing of the pension lifetime allowance â and how it could impact you.
If in doubt, seek advice to avoid any costly mistakes.
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