Pensions warning as many Britons could be affected by Rishi Sunak’s 55% tax burden in 2022 | Personal Finances | Finance
Saving for retirement is something that many people will do years before retirement to ensure they have enough. However, individuals could find themselves penalized if they save “too much”, as there are rules regarding limits and fees. The Lifetime Pension Allowance (LTA) sets a limit on the amount a person can accumulate in pension benefits over their lifetime while receiving tax benefits.
For example, someone in a defined benefit plan might not know that their pension is valued at 20 times their annual pension for long-term adjustment purposes – which means an annual pension of £ 30,000, for example, is actually worth £ 600,000 for purposes of comparing it to compensation.
Also, many others might think they are far away, but might be closer to crossing the line than they initially think.
WEALTH at work cited the example of a 45-year-old with a pension fund of £ 400,000 and a salary of £ 50,000 who saves five percent in a pension that grows three percent per year.
If they also received employer contributions of 10%, it would be possible for them to exceed the LTA limit before the age of 65.
A third group of people who could be affected are those who believe they are protected, but who are not such as those who retire from their professional retirement.
The group explained, “This is because of how the rules for automatic enrollment work, which means employees are re-enrolled every three years. A single month of contribution could invalidate the protection previously granted, without anyone realizing it.
“Responsible employers will notify employees that they are considering re-enrolling, so that they know that pension contributions will be deducted from their monthly salary.”
However, there are steps a person can take to reduce their chances of exceeding the lifetime allowance.
One of these options is to consider other methods of saving for retirement, such as an ISA or a workplace savings plan.
This could still help Brits move their money toward retirement, while avoiding the possibility of a tax levy.
Early retirement is also touted as a way to avoid LTA, taking a lower annual income to help a person reduce the value of their pension below the lifetime allowance.
However, this is not something to be taken lightly, and Brits are encouraged to seek financial advice before embarking on this path.
Finally, individuals may wish to withdraw money from their pension tax-free, as this could reduce potential charges for the second LTA at age 75.
But be aware that the cash withdrawn from a pension will again be part of their heritage for purposes of inheritance tax (IHT).