Britons could be hit with 55% tax charge on pension savings - threshold frozen until 2026
BRITONS could face a punitive tax charge on their pension savings.
The Retirement Podcast Cafe gives expert advice
People saving for retirement could face a shock if they put too much into their pension pot. The Lifetime Allowance could come into play and leave them with a bill on their savings.
The Lifetime Allowance restricts the amount Britons can save into their pension pot during their life.
The limit is currently set at £1,073,100.
Exceeding the LTA could bring a financial penalty.
Those who breach the limit may be slapped with a tax charge of up to 55 percent.
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Pensions are generally tested for the LTA when someone draws from their fund, reaches age 75, or upon death.
Anyone who falls foul of the threshold must report this on their self-assessment tax return.
Britons who have a final salary pension could be vulnerable to exceeding the LTA.
In March 2021, Chancellor Rishi Sunak announced the limit would remain frozen at its current level until at least 2026.
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This could put more people at risk of breaching the allowance in the coming years due to the impact of inflation.
First introduced in the 2006/07 tax year, the LTA was once much more generous.
It was first set at £1.5million.
In the following years it was then increased, eventually to an all-time high of £1.8million.
It then began to be reduced, culminating in the current level of £1,073,100.
The table below shows the fluctuations in the LTA over time:
- 2006/2007 - £1,500,000
- 2007/2008 - £1,600,000
- 2008/2009 - £1,650,000
- 2009/2010 - £1,750,000
- 2010/2011 - £1,800,000
- 2011/2012 - £1,800,000
- 2012/2013 - £1,500,000
- 2013/2014 - £1,500,000
- 2014/2015 - £1,250,000
- 2015/2016 - £1,250,000
- 2016/2017 - £1,000,000
- 2017/2018 - £1,000,000
- 2018/2019 - £1,030,000
- 2019/2020 - £1,055,000
- 2020/2021 - £1,073,100
- 2021/2022 - £1,073,100
- 2022/2023 - £1,073,100.
Annual Allowance
There is also a restriction on how much Britons can save for retirement in a given year, known as the Annual Allowance.
It is set at a much lower level, currently £40,000.
For those who have an income which fluctuates from year to year, such as self-employed people, this could be important to watch out for.