Retirement savers can be taxed if they save above a certain limit. While there is no limit to the amount a person can save, there is a limit to the tax breaks they can receive.
This is the lifetime allowance with a limit of £1,073,100 for pension savers.
If total retirement savings exceed the limit, retirement savers have two choices.
First, they could pay a hefty tax bill of 55 percent of the sum over the border.
Alternatively, they could pay 25 percent if the funds remain in the pension.
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“It just hits people who often save relatively modest amounts but enjoy strong investment performance.
“A pension of £1million sounds like a huge pension fund by any measure, but that would give you an annual income of around £40,000, which is hardly a king’s ransom.”
The lifetime allowance will also be frozen at its current level until at least 2026.
The decision was made by former Chancellor Rishi Sunak and announced in the lower house.
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With a frozen allowance and investment growth over time, more retirement savers are likely to be inadvertently pushed into the tax’s purse.
Drawn into the tax net, these individuals will be forced to face a tax bill they may never have thought they would pay.
Mr Tully also offered an insight into the implications of the frozen lifetime allowance.
He added: “By simply freezing the allowance, the Treasury is expected to generate almost £1billion in additional tax over the next few years. This shows how expected to meet savers trying to do the right thing.
“We want the lifetime allowance for defined contribution savers to be completely abolished.
“An annual allowance that limits savings in retirement would massively simplify pensions in one fell swoop.”
Canada Life has suggested paying the tax bill “may be a better option” than opting to stop saving for a pension.
This is especially the case when an individual receives generous employer contributions that they may not want to forego.
Pensions can also be inherited in a tax efficient manner and individuals have been encouraged to take this into account when making their decision.
A spokesman for the UK Treasury recently told Express.co.uk: “The lifetime allowance has been frozen to ensure the sustainability of public finances and the current threshold means savers over £1million can put into their pension totally tax-free .
“More than nine out of ten people approaching retirement have a pension pot worth less than the lifetime allowance and are therefore not subject to a tax burden.”