Pension warning: Britons must stay under savings limit or face 55% tax charge

Expert reveals tips on how to save for retirement

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Britons can benefit from tax relief on their pension savings, but only up to a certain point. The presence of the Lifetime Allowance (LTA) looms over those who have saved effectively for retirement.

The LTA imposes a limit on the tax-free amount Britons can save towards retirement during their life.

The limit currently stands at £1,073,100.

There could be a financial penalty imposed on people who exceed the LTA. This could come in the form of a tax charge of up to 55 percent.

Britons who breach the LTA must report this on their self-assessment tax return.

People will generally have their retirement pots tested for the LTA when they draw from their pension, reach age 75, or upon death.

LTA freeze

Chancellor Rishi Sunak announced back in March 2021 that the LTA would stay frozen at £1,073,100 until at least 2026.

This could be bad news for pension savers, as the effects of inflation over time could push more people over the limit.

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The LTA was originally introduced in the 2006/07 tax year, and was set at a significantly higher level of £1.5million.

It was then increased over the next few years, rising as follows:

  • 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

However, the LTA then began to be tapered down, before increasing slightly to reach today’s threshold:

  • 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.

There is another limit on retirement savings known as the Annual Allowance.

As the name suggests, this caps the tax-free pension savings of Britons in a given year.

It currently stands at £40,000.

As with the LTA, anyone who exceeds the Annual Allowance must report this on their tax return.

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