Pension warning as savers slapped with 55% tax on retirement fund | Personal Finance | Finance

To enjoy the retirement someone dreams of, it is important they save as much as possible to support their post-working life. However, Britons could actually be punished for saving too much into a pension.

This is due to the presence of the Lifetime Allowance (LTA), which could come into play for people who have saved effectively for retirement throughout their life.

What is the Lifetime Allowance?

The Lifetime Allowance is a limit on the amount someone can save into a pension in their lifetime.

People who breach the allowance could face a punitive financial penalty.

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Although this appears to be an incredibly large amount, the reality is that many people could come close to the limit, even if they do not consider themselves especially wealthy.

In particular, people who have a final salary pension could be vulnerable to exceeding their allowance.

One of the issues surrounding the limit is that it has not been increased since the 2020/21 tax year.

As a result of this fact, along with the effects of inflation, more and more people could be at risk of breaching the LTA.

It then actually increased in 2007/08 to £1.6million, and then again to £1.65million in the 2008/09 tax year.

Two additional increases were then implemented, lifting the allowance up to £1.75million in 2009/10, before another rise to its highest ever level at £1.8million the following year.

Since then though, the LTA has been steadily reduced.

The Lifetime Allowance reached its lowest historical level in the 2016/17 tax year, when it dropped to £1million in 2016/17, before increasing to today’s level of £1,073,100 in the 2020/21 tax year.