Taxman creams off £110m from pensions of middle class savers

MIDDLE-CLASS earners are being dragged into a tax trap that netted the Treasury £110million last year.

Complicated changes to pension rules mean that thousands face paying the taxman up to 55 per cent of their retirement pots.

The reason is that both Conservative and Labour chancellors have cut the maximum amount people can save towards their old age before the taxman comes knocking.

The so-called Lifetime Allowance was £1.5million in 2006, but successive governments whittled it down to £1million 10 years later.

Anyone with more has it taxed at 55 per cent if taken as a lump sum, or 25 per cent if taken as income.

Although a £1million pension pot may sound like the preserve of the super-rich, it is within reach of many doctors, senior nurses, school heads and managers.

For example, say experts, a 35-yearold on a £57,000 salary with pension contributions equalling 15 per cent of their salary would end up over the Lifetime Allowance by the age of 70.

More than 10 per cent of the UK’s 23.6million full-time employees earned more than £57,689 in 2017, according to the Office for National Statistics.

And more than 40 per cent people fell foul of the Lifetime Allowance in 2016/17 than in the previous financial year. It meant the Government collected £110million from 2,410 people – a £30million increase over 2015/16 when 1,610 had to pay.

In 2006/7, 210 were affected and the Treasury netted £5million.

Since then, the number of people who have been affected by the Lifetime Allowance changes has increased by 1,047 per cent over ten years.

The figures were obtained from a Freedom of Information investigation by retirement specialist Old Mutual Wealth. Ian Browne, pension specialist at the firm, said the figures made planning ahead even more important.

“On the outset, a lifetime allowance of at least £1million seems completely reasonable,” he said.

“Once they hear such a large figure people are likely to tune out, convinced it will have nothing to do with them.

“But this underestimates the power of compounding interest, investment, tax-free growth and continual pension contributions.

“As a long-term investment, what might seem like a modest amount could exceed the allowance by the time you start to withdraw.

“People should not mistake the Lifetime Allowance as just a concern for the top one per cent.

“In fact, the allowance would need to go above £4.5million if it were just to impact the top one per cent.”