Rishi Sunak’s 55% ‘nightmare’ pensions tax trap – who pays and who WON’T

In March, Sunak froze the pensions lifetime allowance until 2025/26, in a move that will raise an extra £1 billion from pension savers over five years. Many who thought they were safe from this punitive tax may now get caught, and face “draconian” tax penalties.

The lifetime allowance is the maximum you can build in personal and workplace pensions over your lifetime.
If you exceed it, HMRC will hit you with a vicious 55 percent tax charge, making it one of the most punitive levies of all.
An estimated 1.6 million are on course to pay this tax charge, but their numbers will swell as the allowance has been frozen for five years, according to Aegon pensions director Steven Cameron.
A decade ago the lifetime allowance was set at £1.8 million but it has been repeatedly cut and is now frozen at £1,073,100.

This may look high but a surprising number of savers risk breaching the limit, not all of them higher earners, Cameron said. “Higher inflation will further erode the real value of the lifetime allowance in real terms.”

Somebody who has £686,000 in total pensions would get pushed over the limit after nine years if stock markets grew at 6 percent a year.

That assumes they did not invest further money – if they did they would breach the lifetime allowance even sooner.

Younger savers with relatively small pension pots today could also get caught as their money grows.

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To find out whether you are likely to breach the lifetime allowance, ask your various pension providers for a current valuation of all your retirement savings. Otherwise check your annual statements or find the information online.

Your pensions are only tested against the lifetime allowance when you draw an income, receive a lump sum, or die.

Tully said pensions are still the most tax efficient way of building wealth for your retirement. “Paying the lifetime allowance tax charge may be a better option than stopping saving into a pension, especially if you are receiving generous employer contributions.”

If concerned, you could divert your future savings into a tax-free Isa, which is not subject to the lifetime allowance, Tully said. “Consider getting specialist independent financial advice.”