Now tax-mad Sunak ‘fines’ Brits for saving in pension – millions face 55% horror charge | Personal Finance | Finance

That is the most brutal tax rate in Britain, but it isn’t a punishment for people who have broken the rules. Savers are being penalised for doing exactly what the government has been urging them to do, and set aside money for the future.

The controversial tax charge is known as the pensions lifetime allowance, or LTA, and is the maximum you can build up across all your company and personal pensions before HM Revenue & Customs (HMRC) swoops.

People aren’t charged on the amount of money they pay into a pension, but how large it becomes over time.

Which means that people who generate a decent return on their savings are being punished for their investment success.

The LTA used to be £1.8 million, so only the very wealthy paid it, but it has been repeatedly cut back to today’s level of £1,073,100.

In his Budget in March 2021, Sunak froze it at that sum for five years, until 2025/26.

With inflation set to top eight percent while the LTA is frozen, more will get caught out by the 55 percent tax penalty, said Peter Glancy, head of policy at Scottish Widows.

“You could simply be fined if your assets keep pace with inflation. This clearly doesn’t make sense.”

Ian Browne, pensions expert at Quilter, said that even before inflation rocketed, the lifetime allowance was catching more of us out. In the 2019/20 tax year, 8,510 people paid a total of £342 million in the tax.

That was an increase of 21 percent from £283 million the previous year. Now the rate of growth will accelerate over the next five years.

An estimated 1.6 million were said to be caught out before Sunak’s LTA freeze, now that figure is on course to top two million.

For many it will come as a complete shock.

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Browne said the government should be doing everything it can to encourage savers to put money away for their retirement, rather than penalise them in this way.

“Lifetime allowance rules require an intricate knowledge of how pensions work or will catch people out time and again.”

Steven Cameron, pensions director at Aegon, said the £1,073,100 LTA may sound like a huge sum but many will come closer than they realise. 

“For someone aged 65, that size of pension will buy an inflation-linnked income just £29,600 a year  before tax.”

The freeze means growing numbers will be caught out due to rampant inflation, Cameron added.

Thousands of people have been dragged into breaching the lifetime allowance in the last decade, said Ian Pickford, partner at tax and advisory group Mazars.

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“Freezing the LTA is effectively a punishment on saving into a pension, the very thing people are encouraged to do.”

He warned: “If you decide to keep saving into a pension and surpass the LTA threshold, be ready for the tax bill that will come.”

Pickford said your pension savings will be tested against the LTA at numerous times through your retirement.

“This includes every time you crystallise benefits before 75, if you die before 75, and when you reach age 75.”

The big problem is that nobody knows if they will exceed the LTA because they have no idea how their investments will perform in future.

It needs an urgent rethink, Pickford said