Retirees face losing nearly £21k 'in tax from their pension pots'
Many pensioners face losing nearly £21,000 due to frozen allowances
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Pensioners across the UK risk losing nearly £21,000 if the next Government fails to overhaul the current tax status quo, experts have claimed.
Research conducted by Quilter is highlighting the impact of keeping the existing freeze on tax-free pension savings allowances.
Under the Lump Sum Allowance (LSA), Britons can withdraw lump sums of up to 25 per cent tax-free, and to the same amount of £268,275.
However, with Chancellor Jeremy Hunt abolishing the Lifetime Allowance (LTA), there is no longer a 55 per cent tax charge on lump sum withdrawals.
In lieu of this, when an individual's lump sums go over £268,275, they are paying income tax on the excess at the marginal rate.
Since the 2020-21 tax year, this tax-free threshold has been frozen with Hunt previously claiming allowances will be frozen until 2028.
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Chancellor Jeremy Hunt abolished the Lifetime Allowance (LTA)
PADue to this allowance freeze, experts have been warning of the impact of fiscal drag on pensioners' finances. This occurs when tax thresholds are frozen at a time when incomes are rising, resulting in taxpayers being pulled into higher brackets.
If this specific cap is not scrapped, Quilter claims older Britons with larger retirement savings than the average person will lose on £52,059 in extra tax-free savings allowance.
The wealth management firm cites this figure as it is the amount the threshold would have increased to if had kept pace with inflation.
As such, pensioners on the higher rate of tax will be charged a 40 per cent levy which comes to a £20,824 loss. In comparison, older people on the basic rate will miss out on £10,412.
Roddy Munro, a tax and pensions specialist at Quilter, criticised the Conservative Party and Labour Party for failing to address concerns about the impact of fiscal drag.
He explained: “If this threshold remains stagnant amidst rising inflation, individuals will find themselves paying thousands more in tax from their pension pots in real terms.
“Those who have diligently engaged in financial planning, amassing considerable pension wealth, stand to see the value of their pension tax-free cash eroded. The main political parties seem to be relying on this type of fiscal drag to subtly bolster the tax revenue.
“It’s imperative that the next government, regardless of its political affiliation, addresses this issue head-on by unfreezing the level of tax-free cash and ensuring it increases in line with inflation.”
During the Spring Budget 2023, Hunt confirmed the LTA would be abolished which was set at £1,073,100.
Despite this, the Chancellor has not axed the cap on tax-free lump sum pension withdrawals.
LATEST DEVELOPMENTS:
Labour has backtracked on its plan to reintroduce the LTA but has not stated its plans for unfreezing any other caps
GB NEWSEarlier this month, Labour dropped its plans to reintroduce the LTA on pension savings and has, so far, not pledged to unfreeze the cap on tax-free lump sums.
According to Quilter, if the tax-free threshold, then the cap in lump sums would have hit £320,334 by 2030.
Experts are urging pension savers to take action to avoid their hard-earned cash being eroded by inflation.
Former pensions minister Sir Steve Webb added: "To most people, the cap looks large but over years it will bite more and more, purely because of inflation.”