Pension: Rishi Sunak’s Lifetime Allowance freeze may impact middle class – this is how | Personal Finance | Finance

0
32


Pension saving will be important to millions of people who have been planning towards retirement, but there are a number of rules to bear in mind. Most of these relate to how much a person is allowed to save, as well as the amount they can withdraw without triggering hefty taxation. While pension freedoms legislation has allowed Britons more flexibility with their funds, there have also been recent changes which have the potential to impact large groups of people.

Although many individuals may think this figure is too high to impact their pension saving, Ms Ross issued a warning on the widespread numbers who could find themselves affected.

She said: “More and more people are going to get near to the Lifetime Allowance in the next few years, perhaps even without realising it.

“For example, those who have had a career in teaching, perhaps at a slightly more senior level – headteacher, deputy head or head of department – are likely to be affected by this freeze.

“It’s important to note we aren’t just talking about extraordinarily high earners – we’re talking about people who have spent time in upper-middle management.”

Indeed, Ms Ross also highlighted those who have defined benefit (DB) pension arrangements with their employer – often based on years of service and salary – are also set to come up against the “hurdle” of the Lifetime Allowance freeze.

DON’T MISS
National Insurance warning as ‘Crime Agency’ scam call spreads [WARNING]
RBS offering a three percent interest rate account to savers [UPDATE]
Martin Lewis unpacks how to secure the top interest rates [INSIGHT]

Many individuals may be surprised they have to bear the Lifetime Allowance in mind as the figure is often considered to be quite high.

However, Ms Ross took the time to unpack the figures and their implications for pension savers, and continued: “The Lifetime Allowance is frozen at £1,073,100, which may seem like an odd number, and that is going to be frozen for the next five years.

“If that had been increased with inflation, that allowance would’ve risen by £88,900 if we took a view for inflation over the next five years.

“Now, let’s say somebody is right on the Lifetime Allowance and their investments continued to grow at the same level – effectively they will pay 55 percent tax on £88,900. That is the impact on somebody of the Lifetime Allowance being frozen.”

It has been estimated the measure may save the Treasury close to £300million by the time it draws to its scheduled end in 2026, in what some are describing as a stealth tax on the middle class.

However, Ms Ross added: “While I don’t think it is intended to be an attack on the middle class, there are a number of people in mid to high management who are going to be impacted by this.

“I think this is looking at how what have been generally quite generous pension tax reliefs can be limited, or rather the cost of those reliefs.”

Another measure which has fairly recently been subject to change, though, is the annual allowance – which limits the total amount which can be paid into defined contribution pension schemes, and the benefits which can be built up in defined benefit schemes each year.

The annual allowance is capped at £40,000 broadly, or 100 percent of a person’s salary, whichever is the lower figure.

However, as Ms Ross highlighted, a much lower limit of £4,000 may apply if someone has already begun to access money from their pension.

Ms Ross went on to state people should be aware of how these rules could potentially impact them and their savings goals for retirement.

She added: “The consequence of this is that people like doctors and teachers, but particularly doctors, are being affected.

“If you’re in a personal scheme you can control what goes in, and where people come up against the threshold – a cash alternative may be given by an employer.

“Although with this option you’d pay tax and National Insurance, you wouldn’t lose the employer benefit you’d otherwise receive.

“If you are in a final salary scheme, you earn extra pension based on years of service and broadly you are getting more years in the scheme – there’s a monetary calculation for that. But if you opt out of final salary, there can be implications. 

“The real problem is if you earn another year in the scheme, but if it is over the limit, you get an income tax bill this year – but you may not even be retiring for another 10 years.

“Money is going into your pension scheme, but you’re paying tax now out of your net salary. And this could easily be in the tens of thousands of pounds for those who are affected. 

“People will have to pay tax now, and then tax again later when it comes to their pension.”

The problem, then, Ms Ross concluded, is that the freeze to the Lifetime Allowance could well create a similar problem, potentially in similar fields and professions. 

She urged individuals to seriously consider their options, keep an eye on the limits put in place, and take financial advice as and when necessary.





Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here