Pension warning: Britons urged ‘plan ahead’ as many face ‘considerable’ 55% tax raid

Budget 2021: Sunak announces pension lifetime allowance freeze

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Pension saving, while generally considered to be the best option for retirement planning can come with its risks. Namely, one important issue to bear in mind is the Pensions Lifetime Allowance, as if Britons fall foul of it, it may obliterate their savings. The Lifetime Allowance is the maximum a person can hold in personal and workplace pensions over their lifetime – set at £1,073,000 currently.

While this may seem huge, many people could find themselves creeping ever closer to this boundary, particularly with inflation soaring to a 10-year-high of 5.1 percent.

Exceeding the Lifetime Allowance will mean a staggering tax charge of 55 percent, which will shock many pension savers.

However, one of the key benefits of saving into a pension is tax relief – where some of the money that would have been paid in tax goes into a pension rather than to the Government.

Tax relief is paid on pension contributions at the highest rate of income tax a person pays.

But with this becoming costly for the Government, there are concerns about what it could mean for pensions going forward. 

Liz Ritchie, Partner at Mazars, said: “Pensions tax relief comes at a considerable cost for the Treasury.

“Rising from £31.7billion in 2016/17 to an estimated £42.7billion in 2020/21, it’s a clear sign of increased levels of saving across the UK population. 

“The majority of this can be attributed to the success of auto-enrolment.

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“However, it also nods to the fact that annual and lifetime allowances, which have virtually stood still in the last five years, haven’t put a hard stop on savings behaviours.”

Pensions, however, remain a popular option amongst people who are planning for their retirement.

One of the main reasons why is the benefit of compound interest, which sees Britons gain interest on money saved, as well as interest on top of this interest.

It can essentially help money to snowball, and the longer it is saved, the better the outcome is likely to be.

However, while these benefits are undeniable, the idea of allowances and tax raids cannot be ignored.

Statistics appear to show that, as of yet, Britons have not been deterred from their usual savings behaviour.

But for those fearful about a mammoth tax bill on their hard-earned cash, it could put them off saving into a pension – something which ultimately may have detrimental consequences. 

Ms Ritchie appeared to agree with this sentiment, weighing up the pros and cons of pension saving as it currently stands.

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She added: “Not just a savings vehicle or income provider in later life, pensions are also an efficient way of passing down wealth. 

“That being said, savers mustn’t approach lifetime or annual allowances oblivious to the tax considerations and planning ahead is crucial. 

“To both understand what tax liabilities might lay ahead but also weigh up the benefits of pension contributions, against other ways of savings for later life.“

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