Britons avoid being hit with 55% pension charges but inflation sparks warning

Pension: Expert gives advice on preparing for retirement

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Chancellor Rishi Sunak left the annual and lifetime pension allowances untouched today, despite speculation they could be reduced. It means Britons have been saved from incurring additional tax charges, but with the freeze on the pension lifetime allowance remaining, more could be caught in the net.

Steven Cameron, Pensions Director at Aegon warned: “At the last Budget the Chancellor introduced a painful freeze to the pensions lifetime allowance.

“The allowance has been dramatically cut over the last decade and is now frozen at £1,073,100 till 2026.

“While this may look high, it is leading to a growing numbers of savers, and not just higher earners, risking breaching the limit.

“The Chancellor highlighted that higher inflation is with us in the near term at the very least which will further erode the real value of the lifetime allowance. It’s imperative that this freeze doesn’t continue indefinitely.”

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Tom Selby, head of retirement policy at AJ Bell, believed there was a chance Mr Sunak could implement a change to the annual allowance within his Autumn Budget, as it would have been a simple way to save the Treasury money.

He said: “If the Treasury is looking to save money on pension tax relief, the annual allowance is the simplest lever to pull. The annual allowance is currently set at £40,000, while savers can also ‘carry forward’ up to three years of unused allowances as well.

“Lowering this to £30,000 or even £20,000 – in line with the ISA allowance – would raise revenue for the Exchequer while only affecting those who make very large pension contributions.”

As Mr Selby pointed out, a reduction to the annual allowance would not appear to have impacted many people, but this may not be quite true.

Such a change could have gone under the radar as many people could not imagine they would ever contribute the current limit of £40,000 towards their pension in just one year. However, for those whose income has not been relatively fixed throughout their working life, the flexibility of being able to deposit up to £40,000 in any given year could be vital.

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For example, those who run their own business may not prioritise their pension savings during the majority of their career, instead planning to sell their company when they wish to retire and using those funds to pay for their retirement.

By cutting the amount these people could contribute towards their retirement savings in a given year, a spanner could have been thrown into the works of this plan and led to people being hit with tax charges for going over the threshold.

But pension savers across the country can now breathe a sigh of relief after the Autumn Budget passed without mention of the annual allowance, which means it will stay at £40,000 for the time being.

Fuelling the fears around a potential cut to the annual allowance was the fact the Chancellor had already made an alteration to the lifetime allowance, which works in the same way as the annual allowance, but over the course of one’s entire life.

The lifetime allowance is currently £1,073,100, but has previously always increased in line with inflation. However, this will now not happen, with the threshold confirmed to be staying at the same level until 2026.

Mr Selby believed that because of the change already made to the annual, there was less likelihood of it being tinkered with again at Budget.

This proved to be correct, as the lifetime allowance also went untouched at the Budget.

Much like the annual allowance, many people view 1,073,100 as an amount of money they would not be able to amass. But that may not be the case, as plenty of people who would not consider themselves extremely wealthy could get close to, or exceed this limit.

In fact, 1.2 million people were believed to be already on the way to going over the threshold and therefore being hit with tax charges. Following the freeze to the lifetime allowance, it is expected that now 1.6 million people will fall foul of this rule, according to calculations by consultancy company LCP.

That would mean 400,000 more people being charged for saving too much as a result of Mr Sunak’s change, which will keep the £1,073,100 lifetime allowance as it is for the next five years.

So it appears that like with the annual allowance, the current cap is not an unrealistic amount for people to save after all.

Back in the 2011/12 tax year, the lifetime allowance was £1.8million, but it has decreased in recent years down to the current limit. Another cut had been considered at one point earlier this year, which could have taken it down even further to £800,000.

In particular, those who have £300,000 or more in pension savings as present could be running the risk of going over the limit in the future. Worse still, even if they stopped saving towards their pension for the rest of their lives at this moment, they could still breach the threshold based on the returns from their current investments alone.

It is believed that people in their 40s are especially at risk, with more than 160,000 people on course to go past the limit. This issue could impact men more than women because of a general chasm between the size of the pension pots of men and women.

There have been calls for the lifetime allowance to be completely done away with, meaning Britons could save as much as they want with no risk of charges. However, the latest developments appear to represent the Government doing quite the opposite.

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