THE Pension lifetime allowance is the amount of money you can put into a pension pot before paying tax – and it could be in for a boost.
The Chancellor is understood to be looking at increasing the lifetime pension allowance (LTA) to encourage workers back to the jobs market.
Jeremy Hunt is considering allowing workers to put more money into their pension pot before being taxed as part of his Budget package.
The lifetime allowance stands at £1.07 million, with savers incurring tax after that personal pension pot threshold has been exceeded.
It is not yet known how much the Chancellor could put the LTA up by in his fiscal statement tomorrow.
Jeremy Hunt could hike it to between £1.5million and £1.8million, according to reports.
READ MORE IN MONEY
Jeremy Hunt expected to unveil tax & benefit changes in Budget tomorrow
Full list of drinks rising as alcohol duty set to be hiked in Spring Budget
The pension lifetime allowance was first applied in 2006, when it was set at £1.5 million.
It rose to a peak of £1.8 million by 2012 before gradually being cut.
It was due to stay frozen at its current rate of£1.07 million until 2026 -but the Chancellor could choose to bring a change forward.
Here, we explain everything you need to know about the pension lifetime allowance, from what it is to how any changes will affect you.
Most read in Money
Seven predictions for tomorrow's Spring Budget and what it means for you
M&S is doing a Mother's Day afternoon tea for £12.50
Major energy supplier to give thousands £150 free bill credit from TODAY
Cheapest supermarket to buy Easter eggs this week including Cadbury
What is the pension lifetime allowance?
The lifetime allowance is the total amount you can save tax into a pension scheme.
In other words, it’s the maximum amount you can save into all of your pensions combined without incurring a potentially hefty tax charge.
This includes personal, workplace and defined benefit schemes, but excludes your state pension.
The lifetime allowance is one of two which set how much you can pay into your pension before getting penalised with tax.
The other is the annual allowance and caps the amount you can save into your private pension scheme in a tax year.
This is currently set at £40,000 per year, and has also been frozen.
Why has it been frozen?
When the lifetime allowance was introduced back in 2006, it stood at £1.5million.
In 2010-11, it went up to £1.8million. Since then it has been cut, frozen, and increased in line with inflation.
It was frozen again in 2021 and it was expected to last until at least April 2026.
By freezing the pension lifetime allowance, the Chancellor effectively lowered the amount you can put into your pension to avoid an extra tax on withdrawal.
With inflation soaring, the impact has been even greater.
Experts at Interactive investor calculate that had the lifetime allowance gone up in line with inflation, it would be worth £2,288,419 compared to the £1,073,100 – that’s a difference of £1.2m.
But this could all change tomorrow if the Chancellor chooses to increase the LTA.
What does it mean for retirement?
While a figure of over £1million may sound like a big sum, over a retirement of 30 years or more, it won’t pay very generously.
The freezing of the lifetime allowance is not something that only wealthy people need to worry about, as lots of ordinary savers will feel the impact too.
Lots of those affected will be individuals who have "done the right thing" and been diligent about saving regularly over the years – or who have benefited from good investment growth in their defined contribution pension.
And, if the allowance remains at its current level, more and more people could find themselves dragged into having to pay the tax as their salary increases.
How much tax do I pay?
Check out the annual statements from your pension provider setting out what they expect will happen to your pension.
These can help you work out whether you are likely to exceed the allowance.
If you do go above the allowance, you’ll get a statement detailing how much tax you owe. The tax will be deducted before you start getting your pension.
The way the tax applies depends on how you receive the money from your pension.
What can I do if I'm approaching the limit?
If you are on your way to exceeding the lifetime limit, you need to think twice before moving more money to your pension.
As a pension saver, you are able to apply for protection that saves you from the tax.
But this means you have to stop putting any more money aside immediately. Find out more at Gov.uk.
Another option involves using tax-free savings such as ISAs (individual savings accounts) as well as pensions for retirement saving.
In some very specific cases, there may be an argument for breaching the limit, but as the calculations can be complicated, it’s worth seeking independent advice.
Read More on The Sun
Dumped Love Islanders mobbed by fans as they land in UK after missing final
I took my fluffy doodle to groomers – but he came back looking like Pennywise
The same applies if you are concerned in any way about the freezing of the pension lifetime allowance – and how it could impact you.
If in doubt, seek advice to avoid any costly mistakes.
Source: Read Full Article