Budget 2021: Sunak announces pension lifetime allowance freeze
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The Chancellor Rishi Sunak is set to make his Spring Budget statement next week, and he has been encouraged to make changes which could help people save more for retirement. The current rules around pension savings appear to be causing an increasing number of people to pay tax on their retirement fund.
The lifetime allowance (LTA) is one of the limits applied to the amount of money someone can put away for retirement.
Specifically, the LTA restricts the amount an individual can save into a pension throughout their life.
Anyone who exceeds the lifetime allowance could see their pension pot hit with a punitive tax charge.
This charge could potentially be as much as 55 percent.
Britons’ pension funds are generally tested for the lifetime allowance when they draw from their pension for the first time, when they reach 75, or upon death.
A breaching of the LTA must be reported on someone’s self assessment tax return.
The lifetime allowance is currently set at a level of £1,073,100.
This may seem an unachievable amount for many to save for retirement, but it appears more and more people are finding themselves exceeding the limit.
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Part of the reason for this may be that the allowance has not been increased since the 2020/21 tax year, and there is no indication it will rise again in the near future.
Mr Sunak announced at last year’s Spring Budget statement that the allowance would remain frozen until at least April 2026.
Steven Cameron, Pensions Director at Aegon, explained the impact the freezing of the LTA has had and could continue to have.
He said: “The freezing of the pensions lifetime allowance at £1,073,100 until 2025/26 was one of a range of stealth taxes announced in the 2021 Spring Budget.
“By not increasing this in line with inflation, it is reducing the amount people can save in pensions in ‘real’ terms without facing an additional tax charge.
“The lifetime allowance was designed to limit the amount of pensions tax relief for the wealthy, but now it increasingly impacts many not so wealthy people.”
Mr Cameron believes those with valuable defined benefit pensions could particularly be vulnerable to breaching the limit.
He added that if the allowance remains frozen, “many more individuals could face an unexpected tax penalty as a result”.
Inflation has soared in recent months as the UK recovers from the impact of the COVID-19 pandemic.
The most recent inflation figure of 5.5 percent represented a 30-year high.
Mr Cameron urged Mr Sunak to reconsider whether the lifetime allowance is appropriate given the circumstances.
He concluded: “We’d welcome Rishi revisiting this decision in light of current rocketing inflation, ideally by unfreezing the limit earlier than planned and returning to inflation-based increases.”
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