Pension tax warning: Savers could be hit with 55% charge on their retirement pots

Expert reveals tips on how to save for retirement

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The Lifetime Allowance (LTA) is something Britons must be aware of as they save for retirement. Breaching the allowance could lead to a financial penalty.

How does the Lifetime Allowance work?

The LTA caps the tax-free amount Britons can save towards retirement in their lifetime.

It is set at a level of £1,073,100.

People who save more than their allowance may face a tax charge of up to 55 percent on the excess amounts.

The LTA assesses the following pension savings:

  • Defined benefit (final salary or career average) schemes
  • Savings in defined contribution pensions.

The state pension is not assessed by the Lifetime Allowance.

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Lifetime Allowance freeze

It was announced in March 2021 that the LTA would remain frozen at its current level until at least 2026.

This means the allowance will not have increased for six consecutive years.

As inflation increases people’s earnings over time, this could mean more and more savers find themselves brushing up against the limit.

The LTA is currently at the second-lowest level in its history.

It was first introduced in 2006 and set at £1.5million.

The allowance was then increased in the following years, up to a high of £1.8million.

However, it has been tapered down in recent years.

The fluctuations in the LTA can be seen below:

  • 2022/2023 £1,073,100
  • 2021/2022 £1,073,100
  • 2020/2021 £1,073,100
  • 2019/2020 £1,055,000
  • 2018/2019 £1,030,000
  • 2017/2018 £1,000,000
  • 2016/2017 £1,000,000
  • 2015/2016 £1,250,000
  • 2014/2015 £1,250,000
  • 2013/2014 £1,500,000
  • 2012/2013 £1,500,000
  • 2011/2012 £1,800,000
  • 2010/2011 £1,800,000
  • 2009/2010 £1,750,000
  • 2008/2009 £1,650,000
  • 2007/2008 £1,600,000
  • 2006/2007 £1,500,000.

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