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Pension cap tax to hit 59%

The punitive pension lifetime allowance charge looks set to increase to almost 59 per cent for some savers, says Standard Life.

The firm is urging advisers to protect clients’ pension pots by applying for enhanced or primary protection before the April 5, 2009 deadline.

Head of pensions policy John Lawson says HM Revenue & Customs charges 55 per cent when the lifetime allowance is taken as a lump sum. If the excess is taken as a pension, which is compulsory in the public sector, the charge is 25 per cent and then a further 40 per cent – a total of 55 per cent.

But in April 2011, the 40 per cent tax will be replaced by a 45 per cent tax for people earning over £150,000 a year, pushing up the penalty lifetime allowance charge to 58.75 per cent.

Chancellor Alistair Darling announced in the pre-Budget report that the lifetime allowance would be frozen at £1.8m until at least April 2016, which means many more people will be facing the charge.

Lawson says: “Around a quarter of advisers’ clients will have lifetime allowance issues so they really need to be applying for protection immediately.”

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