‘Awful’ pension taxes scare workers into financially disastrous decisions

Punitive pension tax rules have scared savers into making poor and financially damaging decisions.

Those falling foul of the “lifetime allowance”, which caps the amount people can save into their pensions tax free, can be stung by tax charges of up to 55pc. However, 400,000 more savers will have to grapple with the complex rules since Rishi Sunak, the Chancellor, froze the threshold at £1,073,100 for five years. This newspaper is campaigning to reverse the freeze.

Kate Smith, of pension group Aegon and Telegraph Money’s pensions doctor columnist, said the threat of high taxes had in some cases changed savers’ behaviours for the wrong reasons.

“There is a risk that people make irrational decisions when faced with the lifetime allowance and it’s very worrying,” she said. Pension rules have long been subject to reforms and life-changing decisions should not be made when there are moving goalposts, she added.

Someone who stopped saving into their pension because they did not want to breach the lifetime allowance could lose thousands of pounds if they are still far away from retirement and the threshold is later increased or removed altogether, Ms Smith said.

Those who opt out of their pension to pay money into other tax- efficient savings accounts, such as Isas, would lose their employer contributions and tax relief on the money.

Simon Bull, 51, from Kent, who has already exceeded the lifetime allowance, said it was “unreasonable to expect a lay person to have to understand the many rules of this tax.” “There are an astonishing number of rules for this awful, unfair tax. It is impossible to predict future tax liabilities but I am forced to make decisions now that will have an unknown tax impact five years or more into the future,” he said. Richard Harwood of Brewin Dolphin, a wealth manager, said some over- 55s were taking “dangerous” amounts out of their pensions to try to avoid the charge: “The kneejerk reaction is to take a large lump sum to try to avoid the lifetime allowance but it doesn’t work and often ends up hurting them.” Any money taken from a pension and left in cash would be ravaged as inflation has soared to 30-year highs. Jessica Beard