More Britons at risk of ‘sneaky lifetime allowance tax’ as inflation overtakes savings

UK government 'should treat all pensioners equally' says Smith

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Becoming a millionaire often seems like a far-off, idealistic dream but the reality of hitting the seven figure market could be a lot more realistic than people believe. While it sounds ideal, this could be a great cause for concern as the lifetime pensions allowance could blindside Britons not aware of their financial standing.

Sasha Yanshin, managing director of Strategy Desk and finance vlogger shared in one of his YouTube videos that although it is good to consistently save towards retirement, it could be the downfall of Briton’s savings too. 

He shared exclusively with “The crazy fact is that a lot more people will retire with over a million pounds in their pension pot, than they realise.”

Mr Yanshin explained that through workplace pension schemes and packages, assuming one puts in the current minimum pension contribution, they may hit £1million before they turn 60. 

The current minimum pension contribution is eight percent, with employees paying five percent and employers adding in the other three. 

Mr Yanshin calculated using the median wage data revealed by the Office of National Statistics that this means the average UK employee puts £212 towards their pension every month. 

He added: “This might not sound like millionaire-level money, but your pensions can now grow substantially faster than they once used to.

“Gone are the days when you are stuck with your work pension where your pension pot sits around gathering dust and getting little in the way of growth.

“The growing number of self-invested personal pensions (SIPPs) means you can now be in control of where your money is invested.”

The open landscape of pension investing now means Britons could invest in trusted markets such as the US Stock Market Index which Mr Yanshin highlighted has returned over nine percent on average over the last 100 years. 

He added: “Feel you have the right knowledge, experience and risk tolerance to invest in individual companies? You can put your pension money into specific stocks.”

However, it should be noted that every investment has capital at risk and investors are generally cautioned not to invest more than they could afford to lose. 

Mr Yanshin revealed: “And here’s the crazy maths fact: 

“If you start putting away £200 a month from the age of 18 and your investments get that market average nine percent rate of return, your pension pot will be worth over £1,000,000 three months before your 60 birthday.

“And your pension pot will go over the £1,073,100 lifetime allowance before you turn 61.”

It is worth noting that not everyone will want or be able to start contributing at the age of 18, but Mr Yanshin added that progressing up the career ladder doesn’t just mean a bigger salary but also bigger contributions to remain at the eight percent minimum. 

He commented: “And if you do the right thing for the whole of your working life and contribute to your pension and end up going over the lifetime allowance, you might not like the prize.”

Having pension savings above the lifetime allowance will garner a shocking tax bill of 55 percent if it is taken as a lump sum.

Britons can’t hide from the tax by using another method as other ways of retrieving their savings are then taxed at 25 percent, including monthly pension payments. 

Compounding to this dilemma, the original calculations Mr Yanshin shared did not account for variables like skyrocketing inflation, which will also see wages increase. 

He explained inflation’s impact saying: “That just means a lot more of us will have to pay the sneaky lifetime allowance tax after a lifetime of doing the right thing and contributing to our pensions.”

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