The Daily Telegraph

Pension saver millionair­es face £165,000 extra tax bill

- By Jessica Beard

RISHI SUNAK’S freeze on the “lifetime allowance” will mean pension savers hand over an extra £165,000 in tax, analyse suggests.

The lifetime allowance caps the amount that workers can save into their retirement pots without paying tax at £1,073,100. In 2021, Mr Sunak, the then chancellor, froze the upper limit for five years. However, a sudden spike in inflation during the cost of living crisis will wipe nearly a quarter off the limit in real terms by 2025.

Without the freeze, the lifetime allowance would have increased to £1,372,600, according to pensions group Aegon. In real terms, this means the threshold will fall by £234,000 to £839,131 if inflation remains at 10pc next year and then falls back down to 2pc in 2024, as predicted by the Bank of England. The gap could be much wider if inflation remains higher for longer.

Any savings above the threshold are taxed at 55pc if the money is withdrawn as a lump sum. Cash taken as drawdown is taxed at 25pc plus income tax. Untouched pots are taxed at 25pc on the saver’s 75th birthday.

A retiree who starts taking an income in 2025 with a fund of £1,372,600 would not have been above the lifetime allowance if it had increased in line with inflation. But under the freeze, they would have to pay 55pc tax on the difference, resulting in an extra £164,725 tax bill.

Steven Cameron, of Aegon, said it was “alarming” and warned that the stealth tax could cause “real damage” to the pension system and the retirement livelihood­s of thousands.

If inflation remains high around the current 10pc in the next two years, then the lifetime allowance will lose 27pc in real terms, he said.

He said: “Looking at it another way, someone who starts taking an income in 2025/26 with a fund of £1,480,200 wouldn’t have been above the lifetime allowance if it had increased in line with these higher inflation assumption­s.

“But under the freeze, they could face a huge tax penalty of £223,905 just when they need their full pension more than ever to fund a comfortabl­e retirement and cover potential future social care costs.”

Andrew Tully, of pensions group Canada Life, said the allowance was a “draconian measure” that hit even those who were saving relatively modest amounts, but who enjoyed strong investment performanc­e.

He said: “£1m sounds like a huge retirement fund by any standards, but this would secure you an annual income of around £30,000 to £40,000.”

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