Pension warning as 55 percent tax charge ‘catching out’ more retirement savers

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The Lifetime Allowance (LTA) and Annual Allowance are in place to cap the amount someone can save towards retirement before being taxed. Ian Browne, pensions expert at Quilter explained how more and more people are being hit by these tax charges.

He said: “Our highly complex tax system is catching an increasing number of people out as annual allowance and lifetime allowance charges begin to soar.

“This is likely to get even more pronounced in future data sets due to the various frozen allowances announced at the last budget.”

The LTA places a limit on the amount someone can save into their pension pot in their lifetime, while the Annual Allowance applies to each tax year.

Chancellor Rishi Sunak announced in March 2021 that the LTA would remain frozen at £1,073,100 until at least 2026.

The Annual Allowance is currently set at £40,000 per year.

These rates were once much higher, but have been tapered down in recent years.

Mr Brown continued: “Annual allowance charges, which have been plaguing the public sector and NHS doctors in particular, causing doctors to reduce their hours is spiking.

“In 2019 to 2020, 42,350 taxpayers reported pension contributions exceeding their AA through Self-Assessment.

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“The total value of contributions reported as exceeding the AA was £949million in 2019 to 2020 which has increased from £819million in 2018 to 2019.

“Similarly, in 2019 to 2020, 8,510 LTA charges were reported with a total value of £342 million.”

This represents a 21 percent increase from £283million in 2018 to 2019.

Mr Browne explained how the LTA is now an issue for more people than it was designed to impact.

He said: “It is worth bearing in mind that the Lifetime Allowance tax charge was originally only supposed to impact 5,000 individuals yet is now penalising far more than that each year.

“The Lifetime Allowance is now a problem for affluent people as well as those who could be considered high net worth.”

He also urged the Government to do “everything it can at present to encourage savers to put money away for their retirement”.

Mr Browne continued: “While auto-enrolment has been a very successful step in the right direction, it’s important that the highly complex rules around the annual allowance and lifetime allowance don’t hamper the good work the policy has done.

“These rules require an intricate knowledge of the UK’s pension landscape to understand and therefore time and time again catch people out.”

However, with the right advice and with the right holistic retirement plan, Mr Browne believes the effect of the Lifetime Allowance charge can be mitigated.

He concluded: “Either avoiding the charge, deferring part of the charge or potentially reducing it can do this and which route will depend on the individual circumstances of the person.

“However, this is a complicated area of the pensions landscape and without professional financial advice someone could be facing a 55 percent immediate tax charge on the excess.”

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