Pensions ‘shouldn’t be a government piggy bank’ says Altmann
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Pension savings may be raided to cover coronavirus spending according to recent reports, with Rishi Sunak and other Treasury officials reportedly seeking to reduce pressures on public coffers following the pandemic. A number of options may be available to the Government but many expect LTA to be targeted.
The LTA, which governs how much can be saved into a pension before tax charges apply, has been dropping in value “dramatically” over the past decade according to recent analysis from Quilter.
Despite this, many fear the current rate could drop even lower to £800,000 or £900,000, which would mean “more people than ever” would end up facing the tax.
As it stands, the LTA has been frozen at £1.073million until 2025/26 following the March Budget.
However, reported leaks from Whitehall sources highlighted that cuts could be on the way to help pay for the costs of the pandemic.
Quilter warned that while people may think that a pot of £800,000 or £900,000 still represents a substantial amount as pensions benefit from investment growth and compound interest, the company calculated a pension of £470,000 has the possibility of falling “foul of the tax charge” in just 15 years if the thresholds are reduced.
Should the LTA threshold be reduced to £800,000 for the 2021/22 tax year and then increases by CPI thereafter, which the OBR assumes is two percent per annum, Quilter worked out what level a pension needs to be at today to hit the charge, assuming a five percent growth per annum net of charges.
Based on the LTA reducing to £800,000, Quilter calculated the following:
- Pension value in 2021 to hit LTA in five years – £626,821
- Pension value in 2021 to hit LTA in 10 years – £542,248
- Pension value in 2021 to hit LTA in 15 years – £469,086
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Quilter also broke down how this would impact people if the LTA is reduced to £900,000, as the following details:
- Pension value in 2021 to hit LTA in five years – £705,174
- Pension value in 2021 to hit LTA in 10 years – £610,029
- Pension value in 2021 to hit LTA in 15 years – £527,721
Ian Browne, a retirement planning expert at Quilter, commented on these results.
He said: “The rumours swirling about the LTA over the last few days will represent a worry for pension savers across the country.
“Pensions by their very nature are a long-term product and it’s unfair of the government to constantly move the goalposts.
“While even pension pots of £800,000 or £900,000 sound like a very large pot of money to many, investment growth and compound interest can mean that the new LTA thresholds can be easier to hit than people may think particularly for those in public sector schemes.
“Our calculations show that someone with a £625,000 or a £700,000 pension pot and are five years away from retirement could be forced to hand over some of their hard-earned cash to the taxman if the thresholds are reduced to £800,000 or £900,000 respectively.
“This is assuming five percent net investment growth and doesn’t take into account any personal or employer contributions which will substantially speed up growth.
“Anyone worried about this should speak to a financial adviser who will be best placed to look at your financial life in the round and produce a financial plan that can mitigate against any changes to the pension tax landscape.”
It should be noted free specialist pension guidance can be offered to those approaching their retirement age through Pension Wise.
Additionally, pension tax rules can be reviewed through the Government’s website and the Money Advice Service.
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