Sunak’s 55% tax decision could cost pension savers £65,000

Budget 2021: Sunak announces pension lifetime allowance freeze

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Pension saving will be important to millions of people, but there are certain restrictions to bear in mind. One of these is the Lifetime Allowance (LTA), which limits how much a person can save across their lifetime while still benefiting from tax relief.

Exceeding the LTA means Britons could be subject to a hefty 55 percent tax which many will want to avoid. 

Currently, the Lifetime Allowance cap stands at £1,073,100, which although may seem a lot, has been frozen.

The decision to freeze the Lifetime Allowance until 2025/26 was taken by Rishi Sunak during his time as Chancellor. 

However, it means more people will be brought into the tax net over time as inflation propels them over the limit.

Now, experts are suggesting Mr Sunak, in his new role as Prime Minister, could oversee the freeze being extended for even longer.

All eyes are now on the Autumn Statement where it has been predicted the Lifetime Allowance freeze could be extended to 2027/28.

Tom Selby, head of retirement policy at AJ Bell, said: “The Lifetime Allowance has been the subject of repeated attacks by successive Governments since hitting the high watermark of £1.8million more than a decade ago.

“The level was steadily eroded away from that point until 2017/18, when at £1 million a Consumer Prices Index (CPI) inflation link was introduced. That only lasted until 2020/21, however, after which Rishi Sunak – then the Chancellor of the Exchequer – froze the lifetime allowance.

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“While the CPI link had been expected to return after 2025/26, it has been suggested the current Chancellor, Jeremy Hunt, is considering freezing the lifetime allowance for a further two years in next week’s Autumn Statement.”

While this kind of freeze might not be an immediate priority for pension savers, it could end up having a costly impact.

An extension would mean the Lifetime Allowance will have been frozen for seven years, and this will affect retirement saving incentives.

AJ Bell states the Lifetime Allowance is set to be almost £260,000 lower by 2027/28 than it would otherwise have been.

As a knock on effect, maximum tax-free cash would also be damaged, to the tune of nearly £65,000 according to the organisation.

Mr Selby continued: “Although a lifetime allowance of just over £1million might sound like a huge amount of money, it puts a relatively low cap on people’s retirement aspirations.

“Consider a healthy 65-year-old with a £1,073,100 pension pot – exactly the level of the lifetime allowance today – who takes their 25 percent tax-free cash (£268,275) and uses the remaining 75 percent (£804,825) to deliver a retirement income.

“That could generate an inflation-protected drawdown income of around £35,000 a year for 30 years in retirement.

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“This is a very decent standard of living but hardly a king’s ransom. 

“What’s more, by freezing the Lifetime Allowance, the amount £35,000 a year can buy someone will be eaten away by inflation.”

It is expected the Autumn Statement will be dominated by the idea of “fiscal drag”, with inflation and earnings growth pushing more people into higher tax brackets.

If thresholds are held or reduced, it could mean millions more are subject to increased taxation.

Chancellor Jeremy Hunt gestured towards this idea when he told Sky News this weekend: “We’re all going to be paying more tax, I’m afraid.”

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