Expert reveals tips on how to save for retirement
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Pension experts have slammed the tax assault as “drastic”, “horrific” and “incomprehensible”, saying it makes planning for the future impossible. “It’s not for the faint hearted,” one said.
Many people do not even know they are at risk, because they assume only the super wealthy will pay.
They could be in for a rude awakening following Sunak’s decision to freeze the pension lifetime allowance for five years.
This allowance is the maximum you can build up in personal and workplace pensions over your entire lifetime.
More than 1.6 million are already on course to exceed the lifetime allowance and incur the 55 percent tax charge, and their numbers are now set to grow.
Stephen Lowe, director at retirement specialist Just Group, has called this “a brutal tax” that will confuse millions.
If your total company and personal pensions exceed the lifetime allowance, HM Revenue & Customs will tax the surplus money at a scarcely believable 55 percent, making it one of the most punitive tax rates of all.
Many believe they will not be affected because the lifetime allowance used to be much higher at £1.8 million, but it has been repeatedly slashed over the last decade.
Now Sunak has frozen it at just £1,073,100 until at least the 2025/26 tax year, as he scrambles to fund Covid bailouts.
One of the biggest problems with the lifetime allowance is that most people have no idea whether they are going to exceed it.
That’s because it does not measure how much you pay in, but the total value of your pension wealth including decades of investment growth.
Lowe said: “It means that people can be punished simply because their investments have performed well.”
Recent strong stock market performance, which saw the FTSE 100 rise almost 15% last year, could push more into the Treasury’s tax net.
Lowe warned: “That makes it unworkable to plan ahead given that no one knows how the stock market will perform in the future.”
Freezing the pensions lifetime allowance while stock markets rise will catch more and more people out this year and beyond.
Planning to reduce your liability is almost impossible because a sudden surge in the value of your pension savings could push you over the brink unexpectedly, Lowe added. “Trying to navigate this complex pension tax rule is not for the faint-hearted. Quite frankly, it is beyond most people’s capabilities.”
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Lowe said constant tinkering with the lifetime allowance will deter people from saving for the future.
“Why should hard working people saving into a pension need to worry about a constantly changing and incomprehensible system? It’s so unfair.”
Lowe is far from the only critic of the pensions lifetime allowance.
Tom Selby, head of retirement policy at AJ Bell, said constant tinkering by successive Chancellors has left taxpayers facing “horrific” complexity and uncertainty.
Becky O’Connor, head of savings and pensions at Interactive Investor, advised keeping a close eye on the total size of your pension pots to avoid exceeding the allowance. “Monitor them regularly to avoid a shock.”
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