People who are too successful in saving for their retirement through a pension will penalised with a 55 per cent tax rate when the lifetime allowance threshold (LTA) is reduced from £1.5m to £1.25m on 6 April, says ACCA (the Association of Chartered Certified Accountants).
When the new limit comes into force, any excess above the £1.25m will be taxed at 55 per cent. ACCA says this might discourage people from saving too much for when they retire.
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. The on-set of paying 55 per cent tax on the amount saved above the threshold is hardly an incentive for people to save for their retirement through a pension.
'Those in the public sector will probably see the full impact of this the most, as many are still in the final salary schemes that will pay out higher amounts and therefore create a higher value ‘pension pot’.'
ACCA says there are ways to limit the impact of this retirement tax. HMRC has a scheme that allows retirees to protect pension pots of more than £1.25m but less than £1.5 million.
While savers will be able to keep their £1.5m limit, this does freeze the pension and savers cannot contribute any more to their retirement pot. However, savers have until 5 April 2014 to ‘fix’ their pension threshold in this way.
Chas Roy-Chowdhury said: 'This is a case of act now or pay later. Retirement might seem like a long way off for many at the moment, but the last thing you will want during your retirement is a huge tax bill eating into savings you have built up through your whole working life. It is worth seeking professional financial advice from a chartered certified accountant to find out all the options available to you before the new threshold kicks in.'