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Every person in the UK has a lifetime allowance (LTA) on their pensions which is the maximum amount they can build up from either their workplace or personal pot without getting charged extra. Currently, the LTA limit is sitting at £1,073,100 which looks like a lot on face value but more and more people are finding themselves breaching the threshold. Experts are warning that pensioners are being “penalised” due to the Government’s decision to freeze the lifetime allowance on pensions.
What is the lifetime allowance?
The LTA was originally set at £1.5million by the Government as a means of simplifying pension rules.
This threshold established the maximum amount a retiree could hit while building up their pension tax-efficiently.
When the allowance was linked to inflation, it rose to £1.8million in 2011/12, before going back to £1.5million the following year.
Previously, the lifetime allowance was reduced from £1.25million to £1million for the 2016/17 tax year.
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It was then linked back to Consumer Price Index (CPI) inflation from April 2018/19 but was then frozen.
Older people have been concerned about the LTA being frozen as many older people are inadvertently finding themselves being pushed over the threshold.
The result of hitting the limit is being charged with a 55 percent tax levy which is unaffordable for the majority of Britons.
However, recent reports suggest that Chancellor Jeremy Hunt is considering increasing the lifetime allowance.
If this were to be implemented in his Spring Budget, thousands of pensioners will likely avoid the staggering tax charge.
As it stands, the LTA has been frozen at the current rate until at least 2026 while many older households get pushed across the limit.
At the same time, the lifetime allowance has more than halved in real terms since it was introduced almost 20 years ago.
Karen Barrett, the CEO of Unbiased.co.uk, shared why she believes increasing the LTA is a necessary step for the Government to make.
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She explained: “Raising the lifetime allowance is long overdue. It has barely budged in the past seven years, putting more and more savers at risk of facing a hefty tax bill when they hit retirement.
“This is disincentivizing pension saving at a time when it needs to be encouraged.
And although a £1m+ pension pot is deemed out of reach for most savers, it’s not just the wealthiest group being affected here.
“If the LTA remains frozen, anyone who’s saved diligently and consistently and throughout their working life could be penalised.
Rowan Harding, a financial planner at Path Financial, outlined who would benefit the most from this decision.
Mr Harding added: “Individuals in this situation would be impacted by a change to the LTA. A rise to the LTA would mean they can have a higher amount in all of their pension plans before they would be subject to the LTA tax charge.
“This potential rise would be helpful to those who have a high level of pension savings, such as high earners with final salary pension membership (NHS Consultants for example), or those with large money purchase pensions, or a combination of the two types of pension.
“It could be the difference between paying a LTA tax charge or not and at 55 percent tax on any excess this can be a considerable amount of your pension savings to lose in tax.”
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