Millions of ordinary savers will be caught out by the lifetime allowance as a result of the freeze.
Shaun Beal, 62, from Doncaster, said the tax rule may have been designed for the ultra rich but it also caught out those on lower incomes.
“I am sure it wasn’t meant to capture people like myself, a working class seafarer – and if it had risen with inflation or stayed at its previous level I would not be worried about it,” he said.
However, the merchant sailor will have to pay hundreds of thousands of pounds in tax on his £1.4m pension if the threshold remains at its current low.
“I’ve worked 45 years and if someone had told me on day one, I would have changed my pension payments and put more into Isas,” he said. “It’s an unfair tax. People like us who have come from a council house should be able to protect what we have saved. I have saved all my life.”
Upon retirement Mr Beal transferred out of his defined benefit pension, which would have paid him £40,000 a year. When calculated against the lifetime allowance, the retired seafarer would not have breached the upper limit, as it equated to £800,000.
However, when it was transferred to a private pension it was valued at £1.16m. This is because the tax rules are preferential to gold-plated defined benefit pensions compared with private sector pensions. Mr Beal’s pension has since grown to £1.4m with investment returns, increasing his tax bill.
‘I saved into my pension instead of having nice things and now I’ll pay for it’
The Government advocates saving more towards pensions, as millions have not put enough aside. But Jim Harley*, 71, from Edinburgh, said he felt “ambushed” by state messages.
“We were encouraged to put money into our pension by the Government and I have sacrificed other things to do that. Most of that seems a waste of time now because I’m going to have to pay a lot of tax on it,” he said.
Mr Harley, who is retired, said he only found out about lifetime allowance rules this year despite nearing age 75, when he will be tested against the threshold and pay hundreds of thousands of pounds on his £1.8m pension.
“It has been a shock. I paid extra into my pension because I was told it was a good way to keep money safe from inheritance tax for my children.
“I’ve had financial advisers but have never been warned about it until my current one brought it up a few weeks ago,” he said.
Following successive cuts to the threshold from £1.8m just a decade ago, HM Revenue & Customs introduced protections that allow savers who are close to or have hit the new limit to apply for an exemption, retaining the higher limit. Anyone with pension savings over £1m as of April 2016, when the cap was cut from £1.25m, can apply. Mr Harley said he would be doing so.
He said he had continued to pay into his pension and had no plans to draw it all out during his lifetime but hoped it would go to his three children. On his 75th birthday, however, he will lose 25pc of all savings above £1,073,100 even if he never touches it.
“I put that money away rather than paying for nice holidays or having a big car and now I am finding that we can’t leave it to our children without it being taxed. It takes away the incentive to save for your family,” he said.
Mr Harley said he had grown his pot over the years by taking risks in the stock market and choosing “smart but also lucky” investments. But he said it was hardly worth taking the risk given how much would be taxed.
Investment growth made after age 75 will not be taxed against the lifetime allowance.
