Pension warning: Savers could face 55% tax charge on retirement fund as threshold frozen

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Savers must be aware of the Lifetime Allowance (LTA) when putting money away for retirement. Britons could face a financial penalty for saving too much money into their pension pots.

The LTA is a limit on how much someone can save into a retirement fund throughout their life.

It is set at £1,073,100.

The threshold will stay frozen at this level until at least 2026, Chancellor Rishi Sunak announced in March 2021.

As inflation pushes up people’s earnings over time, more people could brush up against the LTA as a result.

Those who breach the LTA could face a tax charge of up to 55 percent on the excess savings.

Pensions assessed for the LTA include:

  • Defined benefit (final salary or career average) schemes
  • Savings someone has in defined contribution pensions

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It does not include the state pension.

The charge enforced upon people who exceed the LTA is called the Lifetime Allowance charge.

How it is applied depends on whether the excess savings were taken as a lump sum or as income.

The 55 percent charge could come as a result of someone taking the excess savings as a lump sum.

The tax should be deducted at source by a pension provider or administrator and paid to HMRC.

Those who draw their excess savings as income may face an immediate 25 percent tax charge.

This would be charged on top of any income tax someone pays on the pension when they draw it as income.

People’s pensions can be tested for the LTA at different points.

This includes when:

  • They start drawing a defined benefit pension
  • They take an income or lump sum from a defined contribution pension
  • They transfer a pension overseas before age 75
  • They reach their 75th birthday and have a pension in drawdown or one that they have not touched
  • They die before age 75 and have pensions they have not touched.

There are usually no additional checks of the LTA after someone reaches age 75.

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