State pension: Savers warned they could face ‘nasty surprise’ with huge tax bill
express– The state pension looks set to increase by £300 this year according to experts, despite the fact the triple lock was suspended by the Government. With average earnings figures being ignored, the pension increase will be ‘double-locked’: in line with the highest of inflation or 2.5 percent. Currently, economists expect the rate of Consumer Price Inflation (CPI) to be higher than 2.5 percent, which means pensioners will get more than the bare minimum next year in payments. According to experts, the CPI rate is forecast to increase by 3.3 percent as of next year.
This would result in a weekly payment boost, from £179.60 to £185.55, for any Briton who has retired since April 2016.
Analysis by the Mail on Sunday estimates this would result in an average increase of £6 per week or £312 a year.
However, while a bigger increase will come as good news, other experts warned in May of a potential problem some savers may face in the near future.
The Times reported that older pensioners are at risk of huge tax bills.
This is because, as over 750,000 people turn 75 this year, this milestone results in savers’ pensions being revalued to ensure the lifetime allowance hasn’t been exceeded.
Introduced in 2006 and now capped at £1.073 million, the lifetime allowance is the limit on the payouts that can be made from your pension without incurring tax charges.
But the second check is often forgotten about by savers, meaning some are caught out with unexpected tax bills.
Claire Trott from the wealth management firm St James’s Place said: “This could mean unexpected tax charges for those who had significant pension funds, who have been prudent in the income they have taken over the years and have had investment growth. This may well be a nasty surprise to some.”
When you turn 75 your pension scheme will provide HM Revenue & Customs with details of your pension, or pensions, and HMRC will “test” your pot against the allowance.
Savers are initially tested when they first take their pension – if you exceed the threshold the charge is 25 percent on anything over the £1.078 million limit. If you take the excess as a lump sum, the charge is 55 percent.
In the second test, checks are done on any investment growth you have experienced since the first, and whether this has pushed you over the lifetime allowance threshold.
As the test solely looks at investment gains, it is only relevant to those in defined contribution schemes.
Experts have also warned that, because Chancellor Rishi Sunak has frozen the lifetime allowance until 2026/2027, inflation could also drag many more people above the lifetime allowance threshold.
Alistair Cunningham from financial advice firm Wingate Financial Planning, warned against relying on forecasts and to keep in mind that the allowance could be decreased.
He recommended building your own spreadsheet on a “pessimistic” assessment based on zero or modest increases to the lifetime allowance and 6 to 10 per cent investment growth a year.
He said: “I may not expect investors to get this, but this is the sort of number I would use in lifetime allowance projections.”