Pension: Britons issued alert as ‘middle earners’ may fall into 55% tax trap | Personal Finance | Finance


Currently, there is a limit on how much people can save into a pension in their lifetime tax-free, known as the Lifetime Allowance. Set at £1,073,100, many people believe this is far off for them, but exceeding the sum could mean a 55 percent tax bill is due.

With inflation soaring, individuals could find themselves inadvertently pulled into a tax net. 

Express.co.uk spoke exclusively to Christine Ross, Head of Private Office – North, at Handlesbanken Wealth Management, who offered insight into the tax.

She said: “When it comes to the Lifetime Allowance, there really is no magic wand to make it all go away.

“However, the people who are most likely to be affected and not know about it are those who are in defined benefit pension schemes.

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“A lot of people who are not necessarily focussing on the Lifetime Allowance are likely to be caught in its net.

“But generally, I do think it is going to be a bigger issue now and in the coming years, not least because the allowance is frozen.”

Once people are aware there is a potential tax burden for them to meet, Ms Ross says it is important to question what to do next.

She stated: “If you’re in a good scheme with great inflation linking, you’re hardly going to come out of it. But at retirement, the benefits are adjusted to take account of the Lifetime Allowance.

“LTA is payable at different events, for someone with a straightforward pension this is called a benefit crystallisation event.

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“The most typical are when you trigger your fund above the LTA, or when you take benefits entirely.

“The 55 percent does take into account the income tax that would be paid – it isn’t just 55 percent and then you paying tax on the residue.

“The charge is a product of the days when you couldn’t take more than a certain amount out of a personal pension.”

Ms Ross indicated basic rate taxpayers may wish to pay the Lifetime Allowance and then draw their pension separately. 

She added: “But if you’re a 45 percent taxpayer, you’d want to take the whole lot as one charge, because you’re effectively only paying 40 percent on income tax.”

Some individuals will have no need or no wish to touch their pension at all, either to protect it from inheritance tax, or pass on to their loved ones. 

Leaving a pension to roll up, Ms Ross highlighted, means the LTA is paid on the earlier of death or reaching the age of 75.

Efforts to legally avoid LTA have resulted in some suggesting reducing the risk on their investments to slow down growth.

However, Ms Ross concluded: “But then you’ve lost 100 percent of that future growth, rather than a proportion in tax.

“If you carry on growing your fund, you’ll keep 75 percent of that growth on a gross basis.”

The matter of Lifetime Allowance and pension management can be complicated, and difficult to tackle alone.

As such, Britons may wish to seek financial advice to provide them with support in decision-making. 

A Treasury spokesperson previously told Express.co.uk: “The lifetime allowance was frozen to ensure the sustainability of the public finances and the current threshold means savers can put over £1 million into their pension completely tax-free.”



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