Taxed 55% if you save too much for retirement
The experts are warning that if you work too hard to save for retirement, then you could be punished with an enormous 55% tax on your savings. They warn that new rules that kick in this April could hit a surprising number of people - and are a major disincentive to saving.
So what are the new rules, and will you be affected by them?%VIRTUAL-SkimlinksPromo%
New ruleThe warning came from the Association of Chartered Certified Accountants, who say that the rule change we need to worry about is a change to the Lifetime Allowance Threshold, which limits the total amount that you can save tax-efficiently in a pension. At the moment that limit is £1.5 million - but in April it falls to £1.25 million. If you save anything over this limit during your working life, then on retirement you'll have to pay 55% tax on the excess.
For many people, the idea of ever being able to save £1.25 million into a pension seems laughable. However, the organisation is warning that thousands of people will be caught out by the change.
Chas Roy-Chowdhury, ACCA head of taxation, said: "While £1.25m might seem like a lot, the limit is not a penalty specifically on the rich. For those in their 30s and 40s, £1.25m or more might resemble a not uncommon-sized pension pot by the time they retire in 30 years' time. Even today, a surprisingly high number of those nearing retirement are likely to have pension pots edging over that limit."
Roy-Chowdhury warns that people in the public sector are particularly at risk, because their final salary schemes are far more generous than most defined contribution schemes in the private sector, and over time those who are promoted to a particular earning level will easily see the notional value of their pension pot rise above the threshold - so they'll be clobbered with the tax.
The 55% tax is particularly punitive. Many people are paying into pensions at the moment because they constitute a decent way to save 20% or 40% income tax. The idea of being stung at the end of the process with a tax far higher than any potential savings is particularly galling.
Short-sightedIt seems impossible that any government should change the rules in a way that puts people off saving. We are heading for a pension crisis, where in a decade or two, the vast majority of people will suddenly find they haven't saved nearly enough for their retirement, and either have to work into their 70s or live on a minuscule income.
The government should be doing everything it can to persuade us to save into a pension. However, in this instance it has decided to prioritise the ability to tax hard-working savers above any notions of encouraging pension saving.
So what can you do?If you are nearing retirement and you already have a lot of money set aside, you can protect your position if you act fast. If you have more than £1.25 million in the pension pot already - and less than £1.5 million - you can freeze the pot before April - and in return for not paying any more money into your pension you will not have to pay the tax.
For those who are further away, and are therefore unlikely to hit the threshold until much later, the advice from the experts is to build a strategy. They say this shouldn't put you off saving as much as you can afford for your retirement, you just need to be aware how much you are likely to save, and use the time you have to diversify some of your savings into other tax-efficient products such as ISAS, and alternative investment vehicles.
But what do you think? Will this put you off saving, will it make any difference to your plans? Or is the idea of being able to afford to save for retirement a distant dream already?