From April this year, the lifetime allowance for pension savings will drop to £1m from the current rate of £1.25m. Essentially, this means that any pension savings you have above £1m will become liable for tax, and although that may seem a huge amount, the risks of breaching the limit could be higher than you think.
Research from Aegon has revealed just how close some people could be to hitting the limit, and even those who aren't yet contemplating retirement or are nowhere near the £1m mark could be in for a shock. Their figures show that a worker with a pension fund of around £650,000 could be in the danger zone, even if they're not planning on retiring for 10 years – and even if they make no further contributions.
"It's not just those who've already got a pension fund of over £1m that need to think about the new lower lifetime allowance," said Steven Cameron, Regulatory Strategy director at Aegon. "There's a much bigger group who need to think ahead to check if ongoing contributions plus future investment growth could push them into a position where they'll suffer a tax penalty.
"However, for most people, exceeding the lifetime allowance is probably a 'nice problem to have', and we wouldn't want individuals to stop contributing unnecessarily or worse still turn down a valuable employer contribution."
Anyone who thinks they may be at risk of breaching the lifetime allowance would be wise to seek professional advice, as there'd be nothing worse than saving religiously only to find out you've got a hefty tax bill to pay.
However, younger workers in particular shouldn't be put off by saving into a pension – as Steve pointed out, many people won't be faced with the issue of breaching the limit, and it certainly shouldn't stop you from saving. Find out more about workplace pensions by reading our guide, and see why it's so important.
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