Rishi Sunak’s ‘heart-breaking’ 55% pension tax wreaks havoc – ‘destroys retirement plans’

Budget 2021: Sunak announces pension lifetime allowance freeze

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Sunak’s decision to freeze the level at which savers pay the complex and unfair charge is catching more savers each year. What used to be a tax on the wealthy is turning into a worry for anybody who is serious about saving for retirement.

Some people have even stopped working or paying into a pension to escape the Chancellor’s tax assault, destroying their retirement plans and leaving them in disarray, experts say.

Michael Copeland, regional manager at specialist financial services mutual Wesleyan Group, said the tax grab is making retirement planning harder and leaves many ordinary savers facing a shock tax bill.

“The thought of being stung with a punitive 55 percent tax is heart-breaking when you consider how much time and effort people put into saving for a comfortable retirement,” he said.

The tax charge is known as lifetime allowance, and is the maximum you can build up in workplace and personal pensions over your lifetime, before paying extra tax on the money.

The lifetime allowance, or LTA, was originally aimed at the super wealthy and peaked at £1.8 million in 2011, but was slashed to just £1 million from 2016.

It was rising with inflation until Sunak froze it at £1,073,100 for five years in his Budget last March. The LTA will stay at that level until April 2026, dragging more people into the pension net as shares and other pension assets rise in value.

Copeland said anyone with pension near this amount risks being stung with a costly tax charge.

“While a limit of just over £1 million might sound like a lot, those who set money aside throughout their whole career, and see good investment growth, can soon hit it.”

Many call it a tax on investment success, and a stock market surge could tip savers into trouble unexpectedly.

Current estimates suggest around 1.6 million Britons will pay this tax to HM Revenue & Customs, but their numbers will grow due to Sunak’s freeze.

The average tax bill for those who get caught is a staggering £40,235.

People have even changed working and retirement patterns to avoid paying money to HMRC, Copeland said. “Some choose to cut their working hours or retire earlier than they had planned.”

If you are in danger of hitting the lifetime allowance, the good news is that there are several things you can do to escape the charge.

Copeland said review all of your annual pension statements to check how close you are to the maximum allowance. “This can help to avoid any surprises later down the line.”

If at risk, consider saving future funds into a tax-free Stocks and Shares Isa, where the money is not subject to the LTA.

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You may be able to reduce the tax charge from 55 percent to 25 percent, by drawing your pension as income instead of a lump sum, said Colin Dyer, client director at Abrdn Financial Planning.

However, you will have to pay income tax on top. For higher-rate taxpayers the tax bill may still be 55 percent, while basic rate taxpayers could pay 40 percent in total.

Many will still see this as unnecessarily punitive.

Savers whose pensions were worth more than £1 million on April 5, 2016, may be able to apply for protection against the allowance, which was reduced that year.

They can apply for Individual protection 2016 or Fixed protection 2016, depending on their personal circumstances. Find out more at Gov.uk.

Dyer added: “Anyone concerned about breaching the lifetime allowance should speak to a financial planner as this is a complex area.”

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