Pension warning as Britons may face hefty 55% tax bill – how you could avoid it

Budget 2021: Sunak announces pension lifetime allowance freeze

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The Pension Lifetime Allowance (LTA) limits how much a person can save in their lifetime tax-free. It is currently set at £1,073,100, frozen at this level until 2026. Exceeding it could mean a tax bill of 55 percent.

With inflation soaring, and many choosing to stay in work for longer, Britons could be inadvertently setting themselves up for a tax bill in this regard. 

One 51-year-old man told The Telegraph he was worried about continuing his work as an IT manager on a £60,000 salary, as his pension is close to the Lifetime Allowance limit.

Mr Osborne explained to the newspaper: “I would like to find a way to continue to work without being penalised by the tax system for doing so. The Government has created a disincentive to work beyond 55.”

With breaching the limit potentially setting into motion a hefty 55 percent tax bill, worries about this seem justified.

Indeed, many people have expressed their concerns about their savings potentially being penalised in this way.

However, experts have pointed towards ways the Lifetime Allowance can be managed and mitigated.

MoneyHelper has firstly stressed it is vital for Britons to monitor the value of their pensions to ensure they do not exceed the limit without realising.

The independent financial advisor organisation Frazer James suggests making use of one’s ISA allowance – paying into this tax-free vehicle instead of a pension.

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Alternatively, the group states, some may wish to use their spouse’s pension, redirecting funds there to avoid a charge.

Evelyn Partners has stated taking the maximum tax-free cash entitlement may also be a way to legally avoid a tax charge.

It can leave fewer funds in the pension, and reduce a potential second Lifetime Allowance charge when a person reaches 75.

Their website highlights the benefit, stating: “The upshot is that the overall value of the benefits to be tested against the lifetime allowance will be less.”

However, individuals should also be aware money withdrawn from their pension will then count as part of their estate for inheritance tax purposes. 

For some, early retirement will be the only viable option, and Jonathan Watts-Lay, Director at WEALTH at work, has previously touched upon this matter.

He explained: “A simple way to avoid exceeding the LTA, or incurring further charges, is to stop contributing into your pension and take early retirement. 

“It’s important to consider the options available and it may be beneficial to seek regulated financial advice.”

Modelling from PensionBee recently showed typical workers are on track to exceed the current Lifetime Allowance by the age of 64 or 65.

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The organisation suggested this was because many people were unaware of how much they had saved with the assistance of auto-enrolment.

The research showed the Lifetime Allowance was not only a problem for the highest earners.

Even 18 to 21 year olds with an average salary for their age group of £12,275 could be likely to reach the threshold at 64 to 65, with an expected pot of £777,489 by 60, the group found. 

Romi Savova, CEO of PensionBee, said: “While there are already sensible limits on how much an individual can pay into their pension each year, the current Lifetime Allowance limit punishes those who have saved diligently throughout their working life and contradicts the Government’s message that everyone should be saving for retirement.

“A much more reasonable measure would be to eliminate the Lifetime Allowance and instead focus on the current Annual Allowance, where we see far less people contributing up to the threshold as a whole.”

An HM Treasury spokesperson previously told the Lifetime Allowance was frozen to “ensure the sustainability of public finances”. Savers can still put over £1million into their pension completely tax-free.

The spokesperson also noted: “Over nine out of 10 people approaching retirement have a pension pot worth less than the Lifetime Allowance, so will not face a tax charge.”

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