PENSION POT
Budget 2021: Pension lifetime allowance to be FROZEN, Rishi Sunak announces
CHANCELLOR Rishi Sunak has announced that the pensions lifetime allowance will be frozen as part of his Spring budget.
The current allowance is £1,073,100 and was expected to rise in line with inflation - but now it will be held until April 2026.
🔵 Read our Budget 2021 live blog for the latest news & updates
2
The Chancellor introduced the five-year freeze as part of a raft of measures to help pay the Treasury's coronavirus support bills.
The annual allowance, which is currently set at £40,000 per year has not changed.
The lifetime allowance is the maximum amount that you can save into your pension without having to pay extra tax.
Over a million in savings might seem like a huge amount, but over a retirement lasting 30 years or longer, it could pay less than the average UK salary.
For instance, AJ Bell calculations show that if you use a million-pound pot to buy a single-life, inflation-protected annuity it will pay you an annual income of approximately £37,000 per year.
By contrast, in 2020 the average UK salary was £38,600 for a full-time role, according to figures from the ONS.
2
AJ Bell calculated that if you chose to take advantage of the pensions freedoms and access your pension flexibly through drawdown, the lifetime allowance would give you an average income of £43,000.
The freeze is likely to penalise those savers who sacrifice more of their salary to retirement savings or whose pension investments perform particularly well.
Steven Cameron, pensions director at Aegon said: "An increasing number of people who are ‘doing the right thing’ could face a tax penalty if their investments do well."
The lifetime allowance also disproportionately affects public sector workers such as doctors and senior leadership team teachers.
What are the pension allowances
THERE are two allowances which set how much you can pay into your pension pot without being taxed
Annual allowance
The first allowance is the annual allowance, which currently stands are £40,000 per year.
This is the maximum amount that you can save into your pension in a year before you get penalised with tax.
It covers all your pension pots including personal, workplace and final salary schemes.
You might have a lower annual allowance if you have already flexibly accessed your pension pot or if you are a higher earner.
If you bust the allowance you'll need to fill in a self-assessment form and pay a bill.
Lifetime allowance
The Lifetime allowance is currently £1,073,100. This is the maximum you can save in all your pensions combined without paying a tax charge.
If you’re in more than one pension scheme, you must add up what you’ve got saved in all of them to see how close you are to the limit.
You’ll get a statement from your pension provider telling you how much tax you owe if you go above your lifetime allowance. The tax will be deducted before you start getting your pension.
The rate of tax you pay on pension savings above your lifetime allowance depends on how the money is paid to you - the rate is:
- 55% if you get it as a lump sum
- 25% if you get it any other way, for example pension payments or cash withdrawals
Tom Selby, a senior analyst at AJ Bell said: "Among those to be hit by this move will be NHS doctors who benefit from generous defined benefit pensions.
"Furthermore, the longer the lifetime allowance is kept at its current level, the more of middle Britain will be dragged into its orbit.”
It also makes pensions saving less attractive as a benefit to higher earners, which often includes the management of employers.
This can have a trickle down impact, affecting the generosity of the schemes offered to workers in the company - including the lowest-paid.
Nigel Peaple, Director of Policy and Advocacy, Pensions and Lifetime Savings Association (PLSA) said: “The freeze will... create extra costs for pension schemes, and small changes like this are unhelpful in sustaining confidence in pension saving.
"We would prefer Government takes a more strategic approach and does not make piecemeal cuts in allowances.”
Experts say that the decision to freeze the Lifetime Allowance is a long-term stealth grab by the Treasury.
This April there was only due to be a modest 0.5% rise in the lifetime allowance.
But if there is a vaccine-inspired spending boom over the summer, this could push inflation up which would have meant much heftier rises in the future.
Selby said: "By freezing the lifetime allowance as inflation spikes, the Chancellor will stealthily drag thousands more people into his tax net."
Other stealth raids announced in the budget included a freeze on personal income allowances, inheritance tax, capital gains tax, and corporation tax.
Most read in Money
Universal Credit £20 a week boost extended for six months in today’s Budget.
Rishi Sunak to give 600,000 extra self-employed grants of up to £7,500 in today’s Budget.
READ MORE SUN STORIES
Furlough scheme will be extended until end of September as Chancellor Rishi Sunak provides boost for workers in Budget.
Martin Lewis urges parents and pensioners to check if they’re entitled to benefits - how to see what you can claim
Topics