The Pension Lifetime Allowance limits the amount a person can save over their lifetime without being subject to tax. However, many have criticized the tax, saying it punishes those who save “too much” in their kitty.
Express.co.uk spoke exclusively with Andrew Tully, Technical Director at Canada Life, about the charge.
He said: ‘The pension lifetime allowance limits the amount you can accumulate in your pension over your savings life as tax efficiently as possible.
“This includes both your contributions, those of your employer and any investment growth.
“While a £1million pension may seem like a lot, in reality it would guarantee an annual retirement income of around £50,000.
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This means that more people could be subject to tax in future years as incomes increase.
Those who violate this limit risk being hit with a hefty tax bill that could wipe out their retirement savings.
A 55% tax could be applied to any excess balance if someone takes it out in a lump sum, proving devastating for those who have been diligently saving for retirement.
Mr Tully pointed out that a 25% tax could be applicable as income, on top of a person’s normal tax rate.
Naturally, the prospect of this tax has many people worried about the growth of their pension.
As a result, people may wish to keep an eye on their pension and, indeed, how much they are contributing to it.
Mr Tully added: ‘The lifetime allowance is restrictive and penalizes people for trying to do the right thing, saving for their financial security into old age.
“We already have other restrictions on how much we can save in pensions each year.
“It would be much simpler and fairer to just drop the lifetime allowance.
“Unfortunately, this is unlikely to happen as the government has taken over £1.6billion in tax from this allowance since it was introduced in 2006.”
Recently, a spokesperson for the UK Treasury told Express.co.uk: “Keeping the Lifetime Allowance at its current level allows savers to continue making significant amounts of pension savings free of tax.”
“Overall, 92% of people currently approaching retirement have a pension pot worth less than the lifetime allowance, so they will not face a lifetime allowance burden, while the median pension pot for people approaching retirement is around £150,000.”