Budget pension fears
AS CHANCELLOR Rishi Sunak mulls new ways of boosting government revenues in his Budget later this month, pension savers will be crossing their fingers and hoping he leaves the lifetime allowance alone.
There is a real danger he could slash the lifetime allowance, as it has proved a reliable Treasury cash cow over the years.
If he does, this could leave even more savers facing a punitive tax charge of 55 per cent on their pensions, casting a shadow over their retirement plans.
The lifetime allowance is the maximum you can build up in personal and workplace pensions, while still enjoying full tax benefits.
It was introduced to stop the superwealthy using pensions as a tax dodge, but like so many taxes has expanded beyond its original remit.
Now Middle Britain is getting caught out as it is repeatedly cut back.
A decade ago the lifetime allowance stood at a thumping £1.8million but after repeated attacks it has been whittled down to £1,073,100. In March, Sunak inflicted a further blow by freezing it until the 2025/26 tax year.
Tom Selby, head of retirement policy at AJ Bell, said: “This will inevitably drag more people into the net, further boosting Treasury coffers.” More than 8,500
pension pots were hit by the lifetime allowance charge in the 2019/20 tax year, incurring penalties totalling £342million, up 21 per cent on the year before.
There are rumours that Sunak could cut it back when he delivers his Autumn Budget and Spending Review, possibly to as low as £900,000 or even £800,000.
The lifetime allowance does not apply to how much you pay into a pension, but how big it ultimately becomes.
This means it works as a tax on successful investors.as pension pots rise and fall in value with stock markets, savers could bob above the allowance one year and get penalised without warning.
Selby said it adds yet another layer of “horrific complexity” to the pension system, which far outweighs the money raised.
Only one in five say they understand the lifetime allowance, and more than a third had not even heard of it, according to research from Wealthify.
GPS and hospital doctors in the NHS pension scheme are among those hardest hit.almost six in 10 have considered early retirement to avoid breaching the lifetime allowance, according to a British Medical Association survey.
Jon Greer, head of retirement policy at wealth manager Quilter, said the Government should be doing all it can to encourage Britons to save for their retirement, rather than punish them. “Lifetime allowance rules require intricate pensions knowledge but time and time again they catch people out.”
This is just one revenue-raising option Sunak is considering and others may appeal more, said Tom Evennett, head of private client services at accountancy firm EY.
“Changing lifetime allowance rules would be complex with little reward for Treasury coffers.”
Higher earners should check all their pensions to see if they are in danger of breaching the allowance.
If you are worried, consider putting new money into other forms of saving such as tax-free Isas.
It is worth noting that MPS enjoy a far more generous lifetime allowance on their own pension schemes.