Overall Cap on pension savings that can catch out those with modest incomes

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New analysis by Royal London shows more than 1.5 million people are on track to exceed the lifetime allowance on their pension savings.1

Under the current rules, if your pension savings are worth more than £1.055 million, then you have to pay a tax charge of 55% if you take the excess as a lump sum. If you take it as income, for instance as drawdown or by purchasing an annuity, it will be taxed at 25%. This is on top of Income Tax at your marginal rate.

Around 290,000 savers already have pension rights above the limit and well over a million more are at risk of breaching it by the time they retire.2

Almost half of those who are already over the lifetime allowance are continuing to add to their pension wealth, thereby storing up an even bigger tax charge with every passing year.

Rise and fall

When it was introduced in 2006, the LTA stood at £1.5 million. It was then increased each year, reaching £1.8 million by 2010. But since then, successive cuts have put many more savers within range.

The insurer suggests that many senior public sector workers with generous defined benefit pensions are in danger of exceeding the limit – as are better-paid private sector workers with salaries of £60,000 or more.

Touching distance You may also need to consider the needs of younger family members. For instance, it may be better to carry on contributing to your pension if you intend to leave it as a legacy when you die. This is because monies within the pension are outside your estate for Inheritance Tax (IHT) purposes, whereas most other investments count. If the pension pot exceeds the lifetime allowance when you die, then your beneficiaries will have to pay the lifetime allowance charge, but this could be significantly less than paying IHT at 40%

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