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Last updated: 3 Mar 2021
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Spring Budget 2021: The Chancellor reneges on past pension promises

Despite previous assurances that the pensions lifetime allowance would increase in line with inflation following its reduction from £1.8m to £1m in the last decade; the lure of c£300m in tax revenues won out to a more considered long-term approach.

In a Budget that contained few surprises today, the Chancellor went ahead with previously leaked plans to freeze the lifetime allowance at just over £1m for the rest of this parliament. The lifetime allowance is a cap on the level of total pension benefits that one can have before being subject to lifetime allowance tax charges. This allowance had been set to increase by Consumer Price Index (CPI) from the 2020/21 tax year level of £1,073,100 and each tax year thereafter. Instead, it is now frozen until the end of the 2025/26 tax year.

While the lifetime allowance may seem relatively generous at over £1m, this isn’t necessarily the case when viewed within the context of future retirement income. As an example, a 65 year old could expect to receive a pre-tax income of c£25,600 p.a. based on a pension value of £1m, current annuity rates and taking into account an income increasing in line with inflation. Although many investors may not choose to purchase an annuity with their pension funds, it illustrates the level of income one could expect. 

The freezing of the lifetime allowance also has a significant impact on those within defined benefit/final salary pension schemes including the public sector. Many of those who have been at the heart of the effort to fight the pandemic such as doctors and other medical staff are now more likely to face tax charges in relation to their pensions. As some medical unions have commented, it will also affect decisions around early retirement at a time when there’s a shortage of NHS staff.

Unfortunately, pensions generally seem to be considered an easy target for successive governments resulting in frequent changes since the lifetime allowance was introduced in April 2006. Despite significant changes to the pensions annual allowance in recent tax years, which in itself reduces the level of pension savings that one can accumulate, the lifetime allowance continues to be targeted. It’s disappointing to see that the Chancellor has backtracked on previous assurances given and also to see the destabilising impact of continuous changes to pension taxation. The UK is unique within the G7 countries in this regard as most governments elsewhere consider pension policies within a long term context.

The lifetime allowance may not grab the headlines in the same way as other measures introduced but in a similar way to freezing income and capital gains tax bands, it has the net effect of reducing one’s disposable income either now or in the future. Although the Chancellor will of course need to balance the books sooner rather than later, this is a disappointing approach.

About the author

Rachel O'Donoghue

+44 (0)20 7556 1256
odonoghuer@buzzacott.co.uk
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In a Budget that contained few surprises today, the Chancellor went ahead with previously leaked plans to freeze the lifetime allowance at just over £1m for the rest of this parliament. The lifetime allowance is a cap on the level of total pension benefits that one can have before being subject to lifetime allowance tax charges. This allowance had been set to increase by Consumer Price Index (CPI) from the 2020/21 tax year level of £1,073,100 and each tax year thereafter. Instead, it is now frozen until the end of the 2025/26 tax year.

While the lifetime allowance may seem relatively generous at over £1m, this isn’t necessarily the case when viewed within the context of future retirement income. As an example, a 65 year old could expect to receive a pre-tax income of c£25,600 p.a. based on a pension value of £1m, current annuity rates and taking into account an income increasing in line with inflation. Although many investors may not choose to purchase an annuity with their pension funds, it illustrates the level of income one could expect. 

The freezing of the lifetime allowance also has a significant impact on those within defined benefit/final salary pension schemes including the public sector. Many of those who have been at the heart of the effort to fight the pandemic such as doctors and other medical staff are now more likely to face tax charges in relation to their pensions. As some medical unions have commented, it will also affect decisions around early retirement at a time when there’s a shortage of NHS staff.

Unfortunately, pensions generally seem to be considered an easy target for successive governments resulting in frequent changes since the lifetime allowance was introduced in April 2006. Despite significant changes to the pensions annual allowance in recent tax years, which in itself reduces the level of pension savings that one can accumulate, the lifetime allowance continues to be targeted. It’s disappointing to see that the Chancellor has backtracked on previous assurances given and also to see the destabilising impact of continuous changes to pension taxation. The UK is unique within the G7 countries in this regard as most governments elsewhere consider pension policies within a long term context.

The lifetime allowance may not grab the headlines in the same way as other measures introduced but in a similar way to freezing income and capital gains tax bands, it has the net effect of reducing one’s disposable income either now or in the future. Although the Chancellor will of course need to balance the books sooner rather than later, this is a disappointing approach.

What the Budget means for you? 

Consider whether the lifetime allowance may affect you based on your current level of pension savings and if you need to consider other tax-efficient ways of funding your retirement. If you’re not sure if you’re on track, please get in touch below through the form if you would like to review your planning.

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