Pension savers could face extra £165,000 tax bill as inflation rises

Pensions: Expert offers tips for contributions

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The lifetime allowance puts a limit on the amount people can save into their pension pots before paying tax to HM Revenue and Customs (HMRC). In 2021, former chancellor Rishi Sunak froze the uppper limit at £1,073,100 for five years which will mean pensioners lost 27 percent of their lifetime allowance in real terms because of soaring inflation.

The cost of living crisis continues to wreak havoc on the nation’s finances as experts forecast that pension savers who are working hard to fund their retirement could be £165,000 worse off because of soaring inflation.

Former Chancellor Rishi Sunak froze the limit at which people have to start paying tax on their pension savings at £1,073,100 for five years in 2021.

Without the freeze, the lifetime allowance would have increased to £1,372,600, according to pensions experts Aegon.

This means the threshold will fall by £234,000 to £839,131 if inflation remains at 10 percent next year – wiping more than a quarter off the limit in real terms by 2025. 

Steven Cameron at Aegon, called it “alarming” and warned that the stealth tax could cause “real damage” to the pension system, according to the Daily Telegraph. 

He warned that if inflation remains around the current rate of 10 percent, the lifetime allowance will lose 27 percent in real terms over the next two years.

Mr Cameron added: “Looking at it another way, someone who starts taking an income in 2025/26 with a fund of £1,480,200 wouldn’t have been above the lifetime allowance if it had increased in line with these higher inflation assumptions.

“But under the freeze, they could face a huge tax penalty of £223,905 just when they need their full pension more than ever to fund a comfortable retirement and cover potential future social care costs.”

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Meanwhile, pension savers who are reducing their savings because of the cost of living crisis may lose £175 a month. 

They are being warned they could lose out if they opt out of their contributions due to the ongoing cost of living crisis.

Rachel Meadows, Head of Pensions and Savings at Broadstone, said: “For some people, taking the decision to reduce or stop their pension contributions will be necessary as income pressures intensify. 

“However, pension savers should be aware that there are traps and consequences due to considerable employer and Government incentives around pension saving.”

She continued: “Opting out of their pensions may provide some short-term succour.

“It will significantly reduce their total wealth accumulation every month, exacerbated by lost compound investment growth.”

While some people will feel they have little choice to reduce or stop their pension contributions if they are struggling financially, it should be a last resort.

If an employee reduced their contribution by five percent, they would consequently lose their employer contribution.

Canada Life’s Andrew Tully recently told that annuities could be a potential option for people thinking of retiring.

Annuities provide a set income for life for retirees and are safer than relying on the highs and lows of the stock market in drawdown.

Mr Tully explained: “Annuity rates are rising sharply. They are up around 30 percent this year so far.

“For those approaching or in retirement, considering annuitising some of their pension to provide a level of guaranteed income alongside the flexibility of drawdown may be worth considering.”

Meanwhile, a pension alert was recently issued to Britons aged 42 to 57, who have been warned they are not saving enough for retirement.

A report from B&CE found six in 10 households are not saving enough for retirement particulary ‘Generation X’ workers born between 1965 and 1980.

Two thirds of these individuals are not putting enough aside according to experts.

Phil Brown, director of policy at B&CE, said: “Once Generation X starts to retire in large numbers, the UK could face a retirement savings crisis, with people unable to carry on with anything like their current standard of living.”

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