Pensions expert offers tips to keep finances on track in 2022
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Saving for retirement is a hugely important financial task which Britons take on, hoping to reap the rewards with a healthy pension pot when they finish working. However, more and more people are on course to be hit with tax charges which could eat into their savings.
The Lifetime Allowance (LTA) limits the amount of money people can save into their private pensions throughout their lifetime, without paying tax charges.
It is currently set at £1,073,100, which may seem like a hugely far off amount for most people, but this is not necessarily the case.
In fact, with the limit set to remain at its current level for the next four years, it is believed over a million more Britons could end up going over the threshold.
The allowance has gradually been reduced over the years since it was originally introduced in 2006 and set at £1.5million.
It was increased up to £1.8million in 2011/12, before being lowered back down to £1.5million for 2012/13.
The allowance was slashed to £1.25million in 2014/15 and again to £1million from 2016/17.
It became tied to inflation via the Consumer Price Index (CPI) from 2018/19, allowing it to increase to the current level of £1,073,100.
However, since the start of the 2021 tax year, the allowance has been de-linked with inflation and will now be frozen in place until 2026. Dubbed a “tax raid” by some, the move will mean more people are affected by the lifetime allowance.
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Paul Barham, Partner at Mazars, believes the decision from Chancellor of the Exchequer, Rishi Sunak to freeze the LTA will spell bad news for Britons in years to come.
He said: “The Chancellor made the active decision to steer clear of pensions and taxes such as the annual and lifetime allowance during the Autumn Budget.
“However, amid concern around rising inflation, the freeze in the Lifetime Allowance means millions more people could be caught out.”
Inflation has ballooned to extremely high levels in recent months, which is believed to be due to the financial impact of the COVID-19 pandemic.
As the health crisis took hold, restrictions locked people in their homes and reduced spending, meaning inflation plummeted from a steady 1.8 percent in January 2020 down to just 0.5 percent by May 2020.
The CPI rebounded slightly to one percent in July 2020 before dropping all the way to 0.2 percent the following month, marking the lowest inflation rate since December 2015.
When society began to reopen in 2021, inflation skyrocketed as people began to spend again.
Inflation went from just 0.4 percent in February 2021 all the way up to a massive 5.1 percent by November 2021.
Mr Barham continued: “A tax that was originally intended to impact a small proportion of the UK’s top earners will, in the coming years, leave more people exposed to sticky tax situations.
“And while it may not be the focus right now, it has the potential to change the very make-up of the UK workforce.
“For many, it will make deciding exactly the right time to retire a fine balancing act – choosing whether to either retire early or continue contributing and potentially face a higher tax bill.
“A shift away from pensions as the primary source of income in retirement has already begun, with people considering other means of saving and investing to provide a sum of money they can draw from in later life.”
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