Pension savers urged to consider diverting savings to avoid 55% tax charges | Personal Finance | Finance
People work hard all their lives to be able to achieve their goals, which includes saving enough money for their desired retirement. However, if Britons are not careful, they could breach their Lifetime Allowance and end up paying a hefty price.
The Lifetime Allowance (LTA) is the maximum that can be saved into a pension over someone’s lifetime before tax charges apply.
It currently sits at £1,073,100, where it will stay frozen until 2026.
Many people may not even be aware of the limit, or might assume they will never reach it, but the Lifetime Allowance is something every saver needs to be aware of.
This is because the penalties for exceeding the allowance can be stiff, and eat into people’s hard earned pension savings.
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PensionBee CEO, Romi Savova, commented on the implications of breaching the Lifetime Allowance and how Britons can avoid doing so.
She said: “Savers with sizable pensions need to be aware of the implications of the Lifetime Allowance, which is currently capped at £1,073,100 for at least the next four years.
“Those that find themselves on or close to the threshold should consider whether it makes sense to divert some of their savings to another tax-effective savings vehicle, such as an ISA, to avoid penalties of up to 55 percent for breaching this limit and making withdrawals.
“To prevent exceeding the threshold, savers may wish to consider combining their pensions together in one pot, to provide complete transparency over their savings, so they may adjust their contributions accordingly if needed.
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“While there are already sensible limits on how much an individual can pay into their pension each year, the current Lifetime Allowance limit punishes those who have saved diligently throughout their working life.”
Ms Savova explained how people could quite easily find themselves getting close to the upper limit as they put money into their pension pot throughout their career.
She said: “Using certain estimates, a £1million pension would roughly generate a £35,000 annual income, which is not an excessive amount for many retirees who find themselves free from work and looking forward to enjoying their retirement.
“The Lifetime Allowance also deters young savers from making meaningful contributions towards their retirement.”
Ian Browne, retirement planning expert at Quilter, explained how the Lifetime Allowance has evolved over time, leading to the current limit which is considerably lower than a decade ago.
He said: “The LTA has been kicked around like a football since its introduction in 2006.
“It was originally set at £1.5million as part of a plan to simplify pensions and replace a complex legacy of eight different tax regimes.
“Then it was allowed to climb with inflation to reach £1.8million in 2011/12, before being lowered back down to £1.5million for 2012/13.
“In 2015, it was announced that the LTA would be cut from £1.25million to £1million from 2016/17 and tied to CPI from April 2018/19.”
Mr Browne also calculated the present day pension pots which could be in danger of tipping over the limit in the future, with people who have saved generously for retirement potentially at risk.
He said: “A pension pot worth £857,618 in 2022 will hit the LTA in five years time, and a pot worth £641,804 will hit the LTA in 15 years time.
“This is assuming five percent net investment growth and doesn’t take into account any personal or employer contributions which will substantially speed up growth.”
