Last month a freedom of information request by the Telegraph revealed that people who have too much in their pension paid an average of £42,332 in tax. This is an increase of 33%.
The rules are that over your lifetime you can save £1m in your pension. If you have more than this you have to pay 55% tax if you withdraw it as a lump sum or 25% additional income tax if you take it as regular income. This means that you’d lose around half your pension savings in tax.
The problem is the government clawing back tax relief on pension savings by reducing the limit. It used to be £1.8m. It could be argued this is a stealth tax and very unfair; one minute you are encouraging people to save into a pension and the next you are taking them.
The £1m limit may sound a lot but for a 65-year-old couple in buys a joint life, an inflation-linked annuity worth £21,000. Not bad but not really what you’d expect for being a millionaire.
Interestingly, had the limit been linked to inflation it would not be worth £2m but because of the limit, some employees are now being offered cash rather than pension contributions.
If you would like to discuss your finances then get in touch, we can help with a Lifetime Cashflow Forecast so you know what you need for the rest of your life without running out of cash.
Image from Flickr by Rafael JM Souza.