Martin Lewis issues warning over pension tax
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As Hunt battles to bring the country’s finances into order, taxpayers have been thrown onto the front line. Many will be anxiously awaiting his Spring Budget on March 15, expecting another fiscal assault.
Hunt has already frozen the threshold at which we pay income tax all the way through to 2028, dragging more Brits into higher tax brackets every year.
He has frozen inheritance tax thresholds until 2028, netting billions extra for HMRC as our wealth rises.
As if that wasn’t enough, he has slashed the threshold at which millions start paying capital gains tax and tax on any dividend income earned from shares held outside of a tax-free Isa.
It’s a brutal multi-pronged assault on the nation’s private wealth.
Hunt has also frozen something called the lifetime allowance for pension savings until 2028.
This hits a smaller number of people who have saved large sums for retirement, which makes them an easy target.
Yet the pensions lifetime allowance is irrational, unfair and brutal, and does more harm than good. It also conflicts with Hunt’s own policy of getting more people older people back into the workplace.
Most pension and tax advisors would like him to overhaul this tax so that it works in a fairer, simpler way. Personally, I reckon he should just scrap it.
The lifetime allowance, or LTA, caps the maximum you can build up across all your company and personal pension schemes during your lifetime at an arbitrary level.
More than two million have already been caught out and their numbers will rise as stock markets recover.
Under the LTA, anyone whose total pension pot exceeds an arbitrary sum pays an incredible 55 percent tax on the excess to HM Revenue & Customs.
That’s one of the most brutal tax rates of all.
The lifetime allowance stood at a whopping £1.8million a decade ago, so only the very rich had to worry about it.
It has been repeatedly slashed to today’s level of £1,073,100 and now frozen until 2028. That still seems high but a surprising number could pay over the next few years.
The main issue is that the LTA is a mess. It has been called “horrifically complex” because those at risk have no idea whether they are likely to pay it.
A sudden surge in the stock market could tip them over the allowance unexpectedly, triggering that nightmare 55 percent charge.
Robert Salter, a client service director with accountancy firm Blick Rothenberg, says it punishes investors who have saved hard for their retirement or “simply been fortunate enough to enjoy plenty of growth in their pension funds”.
The LTA has been a real drain on the NHS because many hard-working hospital doctors and GPs risk paying it. “It has led to a skills shortage as they look to retire early to avoid having any of their pension taxed at 55 percent.”
Some transfer the money overseas where they will not be subject to this punitive tax, so HMRC ends up getting nothing at all.
Salter says Hunt’s simplest option would be to increase the lifetime pensions allowance to, say, £1.5million or even £1.8million.
That will restore it to its earlier, higher levels and mean that only a small number of very wealthy taxpayers would risk that 55 percent tax rate.
Hunt may not win much applause for doing this but the LTA is not fit for purpose, Salter said. “If the Government is serious about supporting the NHS and encouraging older workers to return from retirement, he needs to address this issue.”
My personal solution would be simpler. Scrap the LTA altogether, at least for savers in defined contribution schemes, where their money is invested in the stock market.
These are riskier than defined benefit final salary schemes, and those who make a success of pension saving don’t deserve to be ravaged by HMRC.
Hunt has better ways of making sure the wealthy don’t do too well out of our pension system, for example, reducing the £40,000 annual allowance for pension contributions.
That would be a blow but at least people would know where they stand. With the pension lifetime allowance, they have no idea until it’s too late.
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