MILLIONS of pension savers could have their pots raided thanks to a new stealth tax set to be unveiled in the November 17 Budget.

And experts have said that the move on retirement nest eggs could put people off saving into a pension at all.

According to The Daily Telegraph, Rishi Sunak and Jeremy Hunt have plans to extend the freeze on the pension lifetime allowance in their Budget later this month.

The pension lifetime allowance is the total amount you can save tax-free in a pension scheme.

Pensioners have to pay tax if their pension pots are worth more than the lifetime allowance. This is currently £1,073,100.

Pension savings over £1,073,100 are taxed at 55% if the money is taken out as a lump sum or at 25% plus your income tax rate if taken out gradually.

READ MORE IN MONEY

Warning for one million due £324 cost of living payment direct to bank accounts

How to avoid the risks of buy now, pay later services this Christmas

So for every £100,000 above the lifetime allowance will mean pensioners will have to fork out £55,000 in tax.

The pension lifetime allowance had been expected to rise in line with inflation last year, but in his 2021 Spring Budget, Rishi Sunak froze it at its current level until 2025/26.

But it now looks like that freeze will be extended by another two years until 2027/28.

Steve Webb, the former pensions minister who is now a partner at LCP, told The Daily Telegraph: "When the lifetime allowance was first
created it was designed to stop the super-rich creaming off too much in pension tax relief over their lifetime.

Most read in Money

"But a series of cuts and freezes has meant that the LTA is now an issue for far more people.

"If the current freeze is extended even further, we could easily see two million people in the workforce having to start to think about capping their pension savings in order to avoid tax charges.

"Double digit inflation means that this policy has been much more brutal than first anticipated and extending the freeze for another two years would make the Lifetime Allowance a mainstream concern for literally millions of people.

"This would add unwelcome complexity to the system and could easily put people off saving into a pension at all."

In a normal year, the pensions lifetime allowance would usually go up in line with inflation – so this is a major kick in the teeth for pensioners.

The UK’s rate of inflation hit 10.1% in September driven by soaring food and energy prices.

And if the lifetime allowance was to go up in line with inflation at 10.1%, it would rise from £1,073,100 to £1,181,483.

The news comes as millions of state pensioners could lose out on promised cash as Jeremy Hunt and Rishi Sunak have refused to commit to the pension triple lock.

The popular triple lock sees pension payments increase in line with whichever of the following is highest:

• Earnings – the average percentage growth in wages in Great Britain
• Prices – the rising cost of living in the UK, as measured by the Consumer Prices Index (CPI)
• 2.5%

Mr Hunt could decide that pensions should only rise in line with earnings rather than the current 10.1 per cent inflation rate.

This would save the Treasury around £7bn.

And the move could mean that those on the new state pension will miss out on as much as £12,296.94 over the next 20 years.

Jeremy Hunt will reveal the government’s highly anticipated Autumn Budget on November 17.

What is the pension lifetime allowance?

The lifetime allowance is the total amount you can save tax-free into a pension scheme.

In other words, it’s the maximum amount you can save into all of your pensions combined without incurring a potentially hefty tax charge.

This includes personal, workplace and defined benefit schemes, but excludes your state pension.

The lifetime allowance is one of two which set how much you can pay into your pension before getting penalised with tax.

The other is the annual allowance and caps the amount you can save into your private pension scheme in a tax year.

This is currently set at £40,000 per year and has also been frozen.

Why has it been frozen previously?

When the lifetime allowance was introduced back in 2006, it stood at £1.5million.

In 2010-11, it went up to £1.8million. Since then it has been cut, frozen, and increased in line with inflation.

It is now frozen again until at least April 2026.

The five-year freeze is one of a host of measures to help pay the Treasury’s Covid-19 support bills.

By freezing the pension lifetime allowance, the Chancellor has effectively lowered the amount you can put into your pension to avoid an extra tax on the withdrawal. This has been dubbed a ‘raid on taxpayers.’

Should inflation continue to rise, the impact will be even greater, as these allowances become even more stingy in real terms.

What does it mean for retirement?

While a figure of over £1million may sound like a big sum, over a retirement of 30 years or more, it won’t pay very generously.

For example, the reality is, for someone aged 65, it will only buy an income of around £26,100 a year at age 65 (increasing in line with inflation before tax).

After basic-rate tax, this equates to a monthly income of £1,950, according to investment firm, Aegon – hardly the income of the super-rich.

The freezing of the lifetime allowance is not something that only wealthy people need to worry about, as lots of ordinary savers will feel the impact too.

Lots of those affected will be individuals who have "done the right thing" and been diligent about saving regularly over the years – or who have benefited from good investment growth in their defined contribution pension.

Freezing the allowance will harm public sector workers such as doctors or senior teachers.

And, if the allowance remains at its current level, more and more people could find themselves dragged into having to pay the tax as their salary increases.

How much tax do I pay?

Check out the annual statements from your pension provider setting out what they expect will happen to your pension.

These can help you work out whether you are likely to exceed the allowance.

If you do go above the allowance, you’ll get a statement detailing how much tax you owe. The tax will be deducted before you start getting your pension.

The way the tax applies depends on how you receive the money from your pension.

Any amount over the £1,073,100 cap that you take as a lump sum is charged at 55%.

Any amount you take as a regular retirement income, such as purchasing an annuity or taking a regular income through a drawdown plan where the pot remains invested, attracts a charge of 25%.

What can I do if I'm approaching the limit?

If you are on your way to exceeding the lifetime limit, you need to think twice before moving more money to your pension.

As a pension saver, you are able to apply for protection that saves you from the tax.

But this means you have to stop putting any more money aside immediately. Find out more at Gov.uk.

Another option involves using tax-free savings such as ISAs (individual savings accounts) as well as pensions for retirement saving.

In some very specific cases, there may be an argument for breaching the limit, but as the calculations can be complicated, it’s worth seeking independent advice.

Read More on The Sun

TV star Patsy Kensit lands dream role in EastEnders

I live in a camper van…it’s cheaper than renting & I don’t pay electricity

The same applies if you are concerned in any way about the freezing of the pension lifetime allowance – and how it could impact you.

If in doubt, seek advice to avoid any costly mistakes.

Source: Read Full Article