Millions of pensioners hand over a staggering 55 percent of their retirement savings to the taxman under a brutal tax that is too complex to understand.
Campaigners have been urging Ministers to reform this tax but Monday’s emergency fiscal statement has dashed their hopes.
Newly appointed Chancellor Jeremy Hunt reversed a string of tax cuts announced by predecessor Kwasi Kwarteng.
Many of these were aimed at the better off, causing outrage giving the cost of living crisis.
Prime Minister Liz Truss had alredy forced Kwarteng to his decision to axe the 45 percent additional income tax band for the wealthy, before sacking him.
Now Hunt has warned that no more taxes will be cut as he looks to restore “confidence” and “stability”.
He also said that his priority now was protecting the most “vulnerable”, as the cost of living crisis rages.
There is now almost no chance the Government will act to solve a long-running pension issue that could soon affect more than two million savers.
The pensions lifetime allowance, or LTA, caps the maximum you can save across all your company and personal pension schemes during your lifetime at an arbitrary level.
Those whose total pension pots exceed the LTA pay an incredible 55 percent tax on the excess to HM Revenue & Customs.
The lifetime allowance stood at a whopping £1.8 million a decade ago, so only the very rich got caught,
It has been repeatedly slashed to today’s level of £1,073,100. Former Chancellor Rishi Sunak then froze it at that level for five years, until at least the 2025/26 tax year.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said constant tinkering with the lifetime allowance means it is no longer something that only the wealthy need be concerned about.
“The reduction and subsequent freezing of it means many more people are being pulled into its web.”
Morrissey added: “This complex system is quite simply nightmarish for many people to navigate and it can act as a real disincentive to save.”
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Anybody who has saved more than £1 million in pensions is unlikely to attract much sympathy, especially at the moment.
Yet many NHS doctors have been caught out, with some deciding to retire rather than pay this punitive tax.
Others trapped include those who have built up a large pot of company and workplace retirement savings.
This is exactly what the Government has been encouraging people to do, to reduce the burden on the state.
Now they are being punished for the crime of investing successfully. Some could pay £165,000 to HMRC as a result of the LTA freeze.
While sympathy may be in short supply, the tax is badly planned and needs reform. A saver who is nowhere near the LTA could be pushed over after a few years of successful investment performance.
Andrew Tully, pensions technical director at Canada Life, said any hope of reform in the near future has now gone.
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“Give the new Chancellor’s latest announcements it seems very unlikely we will see any increases to the lifetime allowance so it will remain frozen to 2026 at least.”
Tully called the LTA “an arbitrary tax which penalises individuals who have enjoyed good returns on their investments”.
He added: “There is also a significant disparity in the way benefits are measured against the LTA, with members of defined contribution schemes treated much more harshly than members of defined benefit final salary schemes.”
Tully said the government already has a way much clearer method of limiting pension tax breaks for the well-off.
This is known as the pensions annual allowance, and limits the maximum you can contribute while claiming tax relief at £40,000 a year.
Adding a lifetime allowance on top of that achieves nothing, Tully added. “All it does is create complexity and confusion.”
He called for the Government to scrap the lifetime allowance altogether, while retaining the annual allowance. “That would massively simplify pensions at a stroke.”
Yet this could be portrayed as a more help for the wealthy and almost certainly won’t happen this Parliament.
Or even the next one, if Labour win.