Middle England faces 55pc pension tax hit for breaching limit

More than a million workers will be hit with 55pc tax bills on their pension savings, falling foul of punitive tax rules caused by the “lifetime allowance”.

Ordinary workers will be caught by the upper limit on how much savers can put into their retirement pot taxfree, Ian Browne of Quilter, an investment house, warned.

The lifetime allowance was designed to affect only the wealthiest 5,000 people when it was established, but 1.25 million non- retired people are now projected to breach the allowance, according to Royal London, the pension provider. Many people in their 20s and 30s face punishing tax charges in later life.

Anyone with more than £500,000 in pension wealth today could cross the upper limit, triggering a tax charge even if they stopped contributing to their pension for the rest of their lives.

Investment growth alone could push them over the threshold, according to figures compiled for Telegraph Money by Quilter.

The lifetime allowance has been frozen for the next five years at its current level – £1,073,100 – as part of the Treasury’s post-pandemic tax raid. Savers who withdraw anything above that limit as a lump sum face a 55pc tax.

A 35-year- old with £407,000 would cross the limit by 65 even if they did not save another pound in their pension and the threshold rose by 2pc every year, after the freeze is over. Investment growth of 5pc every year would be enough to push the pension over the £1 m mark.

A 45- year- old wi th £ 544,000 saved would probably breach the allowance, while those aged 55 could be forced to pay expensive tax bills if they have £ 727,000 saved today. Most workers continue to build up their pot as they work, increasing their chances of breaching the limit by the time they reach retirement age.

Mr Browne said: “Our calculations show that someone with a £500,000 or £600,000 pension pot that is 15 years from retirement will be forced to hand over some of their hard-earned cash to the taxman.”

1.25M

More than a million people will be hit with punishing tax rates in their later years