Expert reveals tips on how to save for retirement
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Britons should be aware of the dangers of exceeding their Lifetime Allowance (LTA) when saving for retirement. Failing to take heed of the limit could mean people being hit with a tax charge on their savings.
What is the Lifetime Allowance?
The LTA sets a limit for tax-free pension savings throughout people’s lives.
Currently, the LTA is set at £1,073,100.
Any savings above this amount could be subject to a tax charge.
Britons could face a charge of up to 55 percent on any excess amounts above the LTA.
The following pensions are assessed by the LTA:
- Defined benefit (final salary or career average) schemes
- Savings in defined contribution pensions.
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The state pension is not included in the Lifetime Allowance assessment.
The Lifetime Allowance will be frozen at its current rate until at least 2026.
This could mean over time, the impact of inflation could push more and more savers over the threshold and subject them to tax charges.
The LTA was previously much more generous, but it has been tapered down over the years.
It was first introduced in 2006 and set at £1.5million.
The allowance was then increased four times in the following four tax years, eventually rising to an all-time high of £1.8million.
However, it was then immediately reduced back down to £1.5million in the 2012/13 tax year.
Another decrease followed in 2014/15, reducing it to £1.25million.
The LTA reached its lowest level in 2016/17 at £1million.
Three small increases have been implemented since, taking it to £1,030,000 in 2018/19, £1,055,000 in 2019/20 and finally to its current level of £1,073,100 in 2020/21.
There is also a limit on how much people can save towards retirement in a given year, known as the Annual Allowance.
It is set at £40,000.
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