Sunak set to freeze pensions lifetime allowance increasing tax burden on thousands more people

The street sign for Downing Street - the official London address of the UK Prime Minister.

Tom Selby, senior analyst at AJ Bell, comments:

“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% rise in the lifetime allowance due to kick in from April this year and more about rises in subsequent years.

“If we see a vaccine-inspired spending boom in the UK this summer, for example, inflation could be pushed northwards – and so too would the lifetime allowance under current legislation. By freezing the lifetime allowance as inflation spikes, the Chancellor will stealthily drag thousands more people into his tax net.

“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.”

“If the Chancellor does freeze the lifetime allowance at 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.”

What can £1 million get you in retirement

“Although £1 million might sound like a huge pension pot, when you stretch that over the course of a retirement that might last 30 years or more it becomes far more modest.

“Take a healthy 66-year-old with a £1 million pot who takes their 25% tax-free cash entitlement and uses the remaining £750,000 to buy a single-life, inflation-protected annuity.

“At current rates, that pot might buy a guaranteed income for their rest of their life worth around £29,000* – enough for a comfortable standard of living perhaps, but only on par with the average UK wage**.

“Alternatively, someone with a £750,000 fund in drawdown who enjoys 4% investment growth per year could enjoy an income of around £32,000 for 30 years***.”

*Source: Money Advice Service annuity calculator, annual inflation of 2% per annum assumed (quote obtained on 26 February 2021)

**Source: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/latest

***Source: AJ Bell calculations – assumes income rises in line with 2% inflation each year

PIMFA adds their voice of concern to the debate 

Following on from these concerns, PIMFA, the trade association for wealth management, investment services and the investment and financial advice industry, has also expressed its disappointment by reports that the Chancellor is considering freezing the Lifetime Allowance for pension savers in next week’s Budget. Read PIMFA’s comment HERE 

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