The pension pots of high earners approaching retirement are in danger of heavy tax impositions, it has emerged, with the government seeming unlikely to back down on plans to cut the pension lifetime allowance from £1.25million to £1million in April next year
Savers who accumulate a pot which is larger than the limit will be forced to pay 55 per cent tax on the excess funds.
While retirees who have saved using a final salary company pension may receive income up to £50,000 before the 55 per cent rate hits, for those with a defined contribution scheme the allowance is about half that, meaning that the penalty tax charge is more likely to effect private sector workers than public sector ones.
“It’s really important to incentivise people to save for the long term but we need to consider how best that can be achieved,” said Baroness Altmann who, before being appointed pensions minister, stated that cutting the allowance would be “really bad policy”. “We need to be sure we’re offering the right incentives at the right time.”
Pete Glancy, head of industry development at Scottish Widows said, “It’s important that the government encourages the people who are in the most need to save, to invest in their pension. A capped ‘annual allowance’ – like we see on ISAs – discourages people from abusing the tax system, while encouraging those with lower incomes to save more. However, reducing the capped ‘lifetime allowance’ is now likely to penalise ordinary people, not just the super rich.
“People on middle incomes who save more, invest wisely and see good growth on their pots should be rewarded for doing so, but are now likely to pay higher rates of tax instead. This may discourage people from saving more or trying to grow their funds for fear of being punished by the tax man. This would be bad news for Britain as people with larger pensions pay more in income tax, purchase more goods and services and so pay more VAT. Savers who made the effort to invest wisely and benefit from larger pensions as a result, should be rewarded rather than penalised as they make a greater contribution to our economy than would otherwise be the case.”