Warning as you could be ‘caught out’ by 55% pension tax

Budget 2021: Sunak announces pension lifetime allowance freeze

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Millions of pension savers will be diligently putting money aside for their future retirement. Many will be hoping for a positive outcome, with the more they save providing them with higher security in later life.

However, pension savers could essentially be punished for saving “too much”, if they trigger an allowance.

The Lifetime Allowance limits how much a person can save into their pension without being subject to a hefty tax charge.

It is currently set at £1,073,100, but exceeding this amount could see Britons slammed with a 55 percent tax charge. 

Express.co.uk spoke to Andrew Tully, technical director at Canada Life, who shed more light on the matter. 

He said: “A £1million pension might sound like a lot. But in reality, this would secure an annual income at retirement of around £30,000 per annum, which rises in line with CPI inflation.”

However, there is another issue surrounding the Lifetime Allowance it is important for Britons to be aware of.

This is the fact the allowance has been frozen until 2026, a decision made by the former Chancellor Rishi Sunak.

Mr Tully warned of the potential implications of this decision for Britons.

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He continued: “The Government has frozen the allowance until April 2026.

“This will result in more people being caught out and facing a tax charge of either 55 percent on any excess balance if you take it as a lump sum, or an extra 25 percent tax as income.”

Those who trigger the Lifetime Allowance will receive a statement from their pension provider to tell them how much tax they owe.

The provider should then deduct the tax before a person starts getting their pension.

People will need to report the tax deducted by filling in a Self Assessment tax return for transparency.

Many experts have questioned the necessity of the Lifetime Allowance, and whether it should still be in place.

The matter has arisen numerous times, but it does not appear any changes are on the horizon.

Mr Tully added: “The Lifetime Allowance is restrictive, and penalises people trying to do the right thing by saving for their future financial security.

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“There is also a significant mismatch between how defined benefit and defined contribution schemes are treated for LTA purposes.

“It would be far simpler to just simply ditch the Lifetime Allowance for defined contribution schemes.

“Instead, there could be reliance on the annual allowance restricting the input. 

“But unfortunately, any changes are unlikely to happen. The Government has raised over £1.6billion in taxes from this allowance since it was first introduced, and this is going to rapidly increase over the next few years.”

An HM Treasury spokesperson previously told Express.co.uk: “The lifetime allowance was frozen to ensure the sustainability of the public finances and the current threshold means savers can put over £1 million into their pension completely tax-free.

“Over nine out of 10 people approaching retirement have a pension pot worth less than the lifetime allowance, so will not face a tax charge.”

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