How an extended pensions lifetime allowance freeze could cost savers £65,000 in tax-free cash

Written by Tom Selby, head of retirement policy at AJ Bell

The lifetime allowance has been the subject of repeated attacks by successive Governments since hitting the high watermark of £1.8 million more than a decade ago.

The level was steadily eroded away from that point until 2017/18, when at £1 million a Consumer Prices Index (CPI) inflation link was introduced. That only lasted until 2020/21, however, after which Rishi Sunak – then the Chancellor of the Exchequer – froze the lifetime allowance at the slightly awkward figure of £1,073,100.

While the CPI link had been expected to return after 2025/26, it has been suggested the current Chancellor, Jeremy Hunt, is considering freezing the lifetime allowance for a further two years in next week’s Autumn Statement.


The impact a seven-year lifetime allowance freeze could have on retirement savings incentives is huge, with the lifetime allowance set to be almost £260,000 lower by 2027/28 than it would otherwise have been. This in turn would massively reduce the maximum tax-free cash someone can generate, to the tune of nearly £65,000.” (See table below for details)

Cap on retirement aspiration

Although a lifetime allowance of just over £1 million might sound like a huge amount of money, it puts a relatively low cap on people’s retirement aspirations.


Consider a healthy 65-year-old with a £1,073,100 pension pot – exactly the level of the lifetime allowance today – who takes their 25% tax-free cash (£268,275) and uses the remaining 75% (£804,825) to deliver a retirement income.

That could generate an inflation-protected drawdown income of around £35,000 a year for 30 years* in retirement – a very decent standard of living but hardly a king’s ransom. What’s more, by freezing the lifetime allowance, the amount £35,000 a year can buy someone will be eaten away by inflation.

The lifetime allowance also creates strange incentives. For example, it punishes people who enjoy strong investment performance – effectively acting as a disincentive for individuals to invest in the real economy, including the UK.


In addition, the lifetime allowance has horrific complexity for savers to navigate and firms to communicate – complexity which inevitably puts people off saving for retirement.

As such, it is in desperate need of reform – and ideally should be abolished altogether for defined contribution savers.

How freezing the lifetime allowance until 2027/28 could hit pension savers

YearInflation rateLifetime allowance (if inflation uprating had been applied)Actual lifetime allowanceDifference

Assumptions: inflation rate for previous September applied in each tax year and rounded to the nearest £100, for years 2024/25, 2025/26 and 2026/27 the Bank of England’s latest projections for Q4 in the previous year is used, for the increase applied in 2027/28 the Bank of England inflation target of 2% is used

Source: HMRC

*Assumptions: £35,000 starting income rises by 2% each year, investment returns = 4% per annum after charges, fund runs out after approximately 30 years


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