Home Finance Pension lifetime allowance could be frozen in Budget tax grab on Britons

Pension lifetime allowance could be frozen in Budget tax grab on Britons


The pension lifetime allowance is a policy currently in place which puts a limit on the amount savers will be able to place into their pension pot tax free each year. The sum usually increases on the turn of every tax year by the rate of inflation, giving savers more ‘wiggle room’ with their later life saving. However, Chancellor Rishi Sunak is now reportedly looking at freezing the threshold at its current level.

She said: “PensionBee is not in favour of Chancellor Rishi Sunak’s reported Budget freeze of the lifetime allowance.

“On one hand, the Government is encouraging people to save privately for retirement by offering tax relief, and raising the state pension age, while on the other, it is penalising them for doing so.

“If the lifetime allowance is frozen for the rest of this Parliament, as rumoured, thousands of savers will incur 25 percent levies on additional income withdrawn from their pension pots, as well as charges of 55 percent if they draw down lump sums.

“Not only will this punish those nearing the allowance limit, who have diligently saved throughout their working life, it will also deter younger savers from meaningfully contributing towards their retirement.”

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Ms Savova added her company would encourage savers, particularly those nearing their allowance, to therefore keep a close eye on the contributions they make.

Consolidating pension pots, she stated, could offer a simple solution to help Britons keep track of their retirement fund and promote transparency. 

Although most people are not affected by the lifetime allowance generally, a freeze could mean more people are forced to bear this in mind.

People should always keep aware of the lifetime allowance due to the interest which can build up on a pension over time.

As the Pension Advisory Service states, a sum which may appear modest at present could end up exceeding the lifetime allowance by the time a person reaches their retirement. 

Steven Cameron, Pensions Director at Aegon also commented on the matter.

He said: “This would mean more individuals, many simply seeking to do the right thing for their retirement, exceeding it, and facing a tax penalty, because of achieving good investment growth in their defined contribution pension.

“The other group likely to be hit are those building up generous defined benefit pensions.

“Overall, however, a freezing of the lifetime allowance would impact far fewer individuals and could be implemented much more quickly.

“A move to a flat rate of tax relief might spread tax relief more evenly across earnings bands but would be far more complex to put in place anytime soon.”

The Chancellor’s Budget takes place on Wednesday, and while details have not been confirmed, it is expected he will address a wide range of economic issues, particularly as they pertain to the pandemic.

Government support schemes such as furlough and SEISS are expected to arise, alongside the temporary increase to Universal Credit.

However, it is clear pension savers will want to watch the economic event carefully to find out the potential implications for their pot.

Tom Selby, senior analyst at AJ Bell, provided additional insight on the lifetime allowance, stating: “Given the damage wrought by coronavirus to the nation’s collective balance sheet over the past 12 months, it was inevitable all areas of Government spending – including retirement saving incentives – would come under the Chancellor’s microscope.

“The decision to scrap lifetime allowance inflation protection for the rest of this Parliament is likely less about the modest 0.5 percent rise in the lifetime allowance due to kick in from April this year and more about rises in subsequent years.

“The longer the lifetime allowance is kept at its current level, the more of middle Britain will be dragged into its orbit.

“If the Chancellor does freeze the lifetime allowance as the Budget, savers will be looking for clarity on when the inflation link will be returned so they can continue to save for the future with confidence.”


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