Pension experts have slammed the tax assault as “drastic”, “horrific” and “incomprehensible”, saying it makes planning for the future impossible. “It’s not for the faint hearted,” one said.
Many people do not even know they are at risk, because they assume only the super wealthy will pay.
They could be in for a rude awakening following Sunak’s decision to freeze the pension lifetime allowance for five years.
This allowance is the maximum you can build up in personal and workplace pensions over your entire lifetime.
More than 1.6 million are already on course to exceed the lifetime allowance and incur the 55 percent tax charge, and their numbers are now set to grow.
Stephen Lowe, director at retirement specialist Just Group, has called this “a brutal tax” that will confuse millions.
If your total company and personal pensions exceed the lifetime allowance, HM Revenue & Customs will tax the surplus money at a scarcely believable 55 percent, making it one of the most punitive tax rates of all.
Many believe they will not be affected because the lifetime allowance used to be much higher at £1.8 million, but it has been repeatedly slashed over the last decade.
Now Sunak has frozen it at just £1,073,100 until at least the 2025/26 tax year, as he scrambles to fund Covid bailouts.
One of the biggest problems with the lifetime allowance is that most people have no idea whether they are going to exceed it.
That’s because it does not measure how much you pay in, but the total value of your pension wealth including decades of investment growth.
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Lowe said constant tinkering with the lifetime allowance will deter people from saving for the future.
“Why should hard working people saving into a pension need to worry about a constantly changing and incomprehensible system? It’s so unfair.”
Lowe is far from the only critic of the pensions lifetime allowance.
Tom Selby, head of retirement policy at AJ Bell, said constant tinkering by successive Chancellors has left taxpayers facing “horrific” complexity and uncertainty.
Becky O’Connor, head of savings and pensions at Interactive Investor, advised keeping a close eye on the total size of your pension pots to avoid exceeding the allowance. “Monitor them regularly to avoid a shock.”
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