The Pension Lifetime Allowance puts a limit on how much a person can save in their lifetime without being subject to tax. However, many have been critical of the tax, saying it punishes those who save “too much” into their pot.
Express.co.uk spoke exclusively to Andrew Tully, technical director at Canada Life, about the charge.
He said: “The pension lifetime allowance limits how much you can build within your pension over your lifetime of savings as tax efficiently as possible.
“This includes both your contributions, those of your employer and any investment growth.
“While a £1million pension might sound a lot, in reality this would secure an annual income at retirement of around £50,000.
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It means more people could be subject to the tax in the coming years as incomes grow.
Those who breach this limit are set to be hit with a hefty tax bill which could obliterate their retirement savings.
A 55 percent tax could be applied on any excess balance if a person takes it a lump sum, proving devastating for those who had been saving diligently for retirement.
Mr Tully highlighted a 25 percent tax could be applicable as income, over and above a person’s normal tax rate.
Understandably, the prospect of this tax fills many with concern about how their pension is growing.
As a result, people may wish to keep an eye on their pension and indeed, how much they pay into it.
Mr Tully added: “The lifetime allowance is restrictive and penalises people who are trying to do the right thing, saving for their financial security into old age.
“We already have other restrictions around how much we can save annually into pensions.
“It would be far simpler and fairer to simply ditch the lifetime allowance.
“Unfortunately, this is unlikely to happen as the Government has raised over £1.6billion in taxes from this allowance since it was first introduced in 2006.”
Recently, an HM Treasury spokesperson told Express.co.uk: “Maintaining the lifetime allowance at its current level allows savers to continue to make significant amounts of pension savings tax-free.”
“Overall, 92 percent of individuals currently approaching retirement have a pension pot worth less than the lifetime allowance, so will not face a lifetime allowance charge, while the median pension pot for individuals approaching retirement is around £150,000.”