Budget 2021: Sunak announces pension lifetime allowance freeze
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Pension saving is encouraged for retirement, but there are strict rules and regulations when it comes to money put away. One of these is the Pension Lifetime Allowance (LTA), which limits how much can be saved by Britons.
While individuals can put aside as much money as they wish, there are consequences for exceeding a limit during one’s lifetime.
The current LTA limit is £1,073,100 for the present tax year, however this will be frozen until 2025/26.
The Chancellor Rishi Sunak took the step to freeze the threshold as part of measures which will up the tax take for the Treasury.
Some experts have described the move as a “stealth tax” implemented over a number of years.
This is because pension investment growth could drag more people over the limit, even if they do not put any more money into their fund.
A consequence of exceeding the LTA is a staggering 55 percent tax bill, which many people will be hopeful to avoid.
When a member of a pension scheme takes certain benefits or at other times such as reaching the age of 75, their sum is tested against the LTA.
If it is found the sum is above the LTA, then the lifetime allowance charge comes into play.
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It will be applied to the value which is in excess of the limit.
The tax rate a person must bear depends on whether the excess is paid as a lump sum, or retained to pay pension benefits.
The former incurs a 55 percent tax charge, while if retained to pension benefits, it is 25 percent – with tax then payable on the income the member receives at their marginal rate.
If a person exceeds the LTA, they will get a statement from their pension provider explaining the tax they owe.
The pension provider should deduct the tax before a person starts getting their pension.
Individuals will need to report the tax deducted by filling in a Self Assessment tax return and sending it to HMRC.
At any point, Britons can ask their pension provider how much of the LTA they have used.
The Government adds: “If you’re in more than one pension scheme, you must add up what you’ve used in all pension schemes you belong to.
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“What counts towards your allowance depends on the type of pension pot you get.”
An HM Treasury spokesperson previously told Express.co.uk: “Maintaining the Lifetime Allowance at its current level allows savers to continue to make significant amounts of pension savings tax-free.
“Overall, 92 percent of individuals currently approaching retirement have a pension pot worth less than the lifetime allowance, so will not face a lifetime allowance charge.
“While the median pension pot for individuals approaching retirement is around £150,000.”
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