Chancellor Rishi Sunak has frozen the lifetime allowance (LTA) for pension contributions at just over £1m for the remainder of this Parliament.
The Chancellor said the LTA would remain at its current level of £1,073,100 for 2020/21 rather than increasing in line with inflation. It had been expected to rise by £5,800 in 2021/22, in line with 0.5% Consumer Prices Index.
The IHT threshold will also be held at current levels until April 2026.
In a widely predicted move – it was leaked last week – the freeze is estimated to net the Treasury an additional £250m in tax.
If the lifetime allowance rose alongside inflation it would increase by a further £88,900 by the end of the current parliament.
It is thought medium to high earners in the public sector – who are building up significant defined benefit (DB) pensions – would be badly affected by the change.
The LTA is £1,073,100 for defined contribution pensions. The LTA in DB schemes is an annual pension amount of one twentieth of the ‘cash’ limit, or £53,655 a year.
The lifetime allowance peaked at £1.8m in 2011/12 before being reduced back down to £1m by 2016/17. It has then risen by the consumer price index each year since then and is currently set to increase to £1,078,900 for the 2021/22 tax year.
To replicate the DB pension with an annuity would cost more than £2m, according to LV= retirement director David Stevens. He pointed out the “LTA is actually far more generous for DB benefits”.
Zurich head of life product and inforce Gareth Jenkins said: “There’s no easy way to fix the nation’s finances but a raid on pensions is particularly punishing, especially alongside the existing limits on annual allowances.
“Freezing the lifetime allowance is nothing less than a tax on growth. This will hit people on middle incomes who save hard or invest wisely, including NHS doctors and headteachers. With the threshold frozen, more people will be dragged into the tax net, as inflation and wages continue to rise over time.”
He added: “Ultimately, this could drive disillusioned savers away from pensions. Savers making long-term decisions for retirement need certainty, not continued tinkering and piecemeal changes.”
Standard Life technical manager Dave Downie said the freeze would only affect a “relatively modest number of taxpayers” this year but that number would grow over time.
“Each year the allowance fails to keep pace with inflation it is a step closer to LTA charges affecting ordinary pension savers. While a pension pot of £1m may feel like a significant sum of money it has to last throughout retirement.
“For someone seeking to keep their drawdown income withdrawals at a sustainable level to last maybe 30 years and take into account inflation, a withdrawal of around 3% provides an annual income of around £32,200 before tax.
“So this isn’t something that will only affect the highest of earners and a prolonged period of no inflationary increases will quickly reduce that income in real terms and could further affect confidence in pensions. But it is important to remember that the LTA isn’t a ceiling on what can be saved into pensions.
“There are many good reasons for those potentially impacted to continue saving into their pension especially if stopping funding means losing out contributions from their employer.”