Rising stock markets mean pensioners face 55% tax

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The number of people breaching the lifetime pension allowance has risen dramatically after strong investment returns pushed more savers above the ceiling, new figures show.

The lifetime allowance punishes those who have too much in their retirement pots with a tax burden of up to 55%.

Figures recently released by HM Revenue & Customs showed the number of people falling into the lifetime allowance trap was already rising before the Chancellor’s controversial decision to freeze the allowance last year.

There was a 21% increase in the value of reported lifetime allowance fees in 2019-20 to £342m, from £283m the previous year.

HMRC said reductions in tax relief since 2010 had led to a “significant increase” in the number of people overstaying the cap.

Becky O’Connor, of fund store Interactive Investor, said: “People are contributing more to individual pension plans and therefore getting more tax relief throughout their working lives, which is a good thing.

“However, the flip side of this seemingly positive image, particularly for high-income earners or those on income or nearing retirement, is the risk of being taken over by lifelong allowance charges.”

Unlike Isa savings, where only contributions are capped, the life allowance applies to the overall size of a retirement pot. This means that rising stock markets can push investors over the edge.

Last year Chancellor Rishi Sunak froze the allowance at £1,073,100 for five years. In real terms, inflation at its current rate will effectively wipe out £278,740 of the allowance by 2025.

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