New lifetime allowance could cost savers billions – Company Formations in England
A reduction in the lifetime allowance (LTA) for pension savings, which comes into effect in April 2014, could cost savers billions in unexpected tax charges according to research from Standard Life.
The LTA – the maximum amount an individual can accrue in pension savings in their lifetime before triggering a tax charge – falls from £1.5 million to £1.25 million in April 2014.
HMRC expects 30,000 savers to be immediately affected by the change but says that 360,000 will be hit in the long term. Savers who exceed the new, lower limit immediately could be liable for a 55 per cent charge on up to £250,000 worth of savings – a £137,500 tax bill.
Research conducted by YouGov on behalf of Standard Life has found:
- The change could cost savers £49.5 billion in tax charges – assuming the 360,000 affected expose the maximum £250,000 and are taxed at the full amount
- Just 19 per cent of people know what the LTA is
- Only 31 per cent of people earning more than £50,000 are aware of the LTA
- Someone 10 years from retirement with multiple pension pots worth around £700,000 could exceed their allowance if their pot grows at seven per cent a year.
Standard Life said that individuals should consider whether the two new protection options, which allow savers to ‘lock in’ at the current £1.5 million LTA, might be suitable for them.
Head of consolidation at Standard Life, Alistair Hardie, said:
“The stark reality is the reduction in the lifetime allowance is going to impact more people than first realised. And it looks as if these people are unaware of the risk of a tax charge they might be facing. Savers might be years away from retirement but if they have saved a fair amount in various pension funds they could be near the danger zone.”