Budget 2021: pensions lifetime allowance frozen
The government will maintain the pensions Lifetime Allowance at its current level of £1,073,100 until April 2026, removing the usual annual incremental rises
However, this was the only announcement on pensions with no move to change the current position on tax relief, which will be a relief for many higher rate taxpayers. Kay Ingram, director of public policy at LEBC Group, said: ‘Freezing the lifetime allowance (LTA) at the current level of £1,073,100 will not make much difference to savers in the short term, as the CPI increase applied would have only increased it to £1,078,900. ‘However, the long-term effects of this change, on top of earlier reductions in the LTA, make it more difficult for savers to save enough to support a comfortable retirement. ‘Those in the private sector and the self-employed are hardest hit by this measure. The amount required to secure a guaranteed lifetime income (an annuity) from invested pension pots has grown at a much faster pace than the lifetime allowance has increased.’ Since 2016 the CPI linking of the LTA has increased it by 7.31% but the cost of buying a lifetime income has increased by 22%. To keep pace with the true cost of securing a retirement income since 2016, the LTA would now need to be £ 1,293,100, Ingram added. Jason Whyte, associate life & pensions partner at EY, said: ‘Freezing the lifetime allowance will help the Chancellor to reduce the ‘cost’ of higher rate tax relief – not much in the short term, but quite a bit by the end of the 2025-26 tax year. It may also turn out to be a precursor to more comprehensive pension reform in the future. ‘The lifetime allowance affects high earners and those approaching retirement age the most, including those with defined benefit pensions. As the value of high earners’ pensions rises over the next five years towards a lifetime limit that will remain fixed, more and more individuals will find they need to stop contributing to avoid breaching the limit.’ The Budget Red Book predicts this will save £300m per year in tax relief by 2025-26. 'The lifetime allowance is seen as a key mechanism to limit future tax relief bills that only impact a small segment of the population, but it is not without challenges. It affects long term savers who have made good investment decisions as much as it does high earners, and it also affects those in final salary schemes – many of whom are in the public sector. In the last Budget, the Chancellor raised the threshold for the annual contribution taper so as not to disadvantage senior NHS staff working extra hours during the pandemic, and by using an extended freeze so the impact is limited in the short term. He has been similarly cautious this time around,' added Whyte.
Courtesy: Accountancy Daily