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Lifetime pension allowance a threat to retirement income

Research from insurer Zurich has suggested that a failure to increase the lifetime pension saving allowance could have big implications on the amount future generations will receive as an income in retirement.

The research, which has now been released as a report, has produced data based on a joint life annuity, and takes into account the effects of inflation escalation. This shows that the current £1.25m cap on tax-free savings would today generate an income of £32,000 per annum. However looking 25 years into the future, if the allowance was to remain unchanged, that amount would fall to £19,810 in today’s money.

In both cases the annuity rate is represented as 2.6 per cent, the payout on the first death would be 50 per cent and inflation is set at 3 per cent.
The ‘lifetime allowance charge’ comes into effect when savers put more than the allowance of £1.25m into their pension. Any amount above the limit that they then withdraw from the pension pot will be subject to the charge.

This charge does however differ depending on the chosen withdrawal method. From April 2015 more people are expected to access their pension as a lump sum as more freedom is attributed to savers, but this will attract a tax charge of 55 per cent on any amount over the £1.25m threshold. Conversely, those taking their pension fund as a regular income would pay a smaller 25 per cent.

Both the annual pension allowance and the lifetime allowance were reduced this financial year, with the annual allowance now standing at £40,000 and the lifetime allowance falling from £1.5m to £1.25m.

It’s thought that the falling allowance will affect 360,000 people who will have pension pots between the old and the new limit, who in future years will see the amount they are taxed on their savings increased.

Zurich said in a statement that people in defined benefit pension schemes are sheltered from the charges to a degree, and that more could be done to ensure the accuracy of estimations , and to make sure that pensions are not undervalued.

The statement read: “We believe people who are making decisions about saving over two or three decades should be given more certainty than this about how their pensions will be taxed, and think it would be fairer for the allowance to reflect the actual amount that people actually invest into a pension as opposed to its overall value.”

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