The LTA had been expected to rise by £5,800 in 2021/22, in line with 0.5% Consumer Prices Index
Chancellor Rishi Sunak’s decision to freeze the lifetime allowance (LTA) for pension contributions has been widely criticised by pensions experts who say the move sends the “wrong message” to savers.
Sunak confirmed the decision to freeze the LTA, along with capital gains tax, inheritance tax and income tax brackets, in today’s Budget speech.
The LTA will remain at its current level of £1,073,100 for 2020/21 instead of increasing in line with inflation. It had been expected to rise by £5,800 in 2021/22, in line with 0.5% Consumer Prices Index.
In a widely predicted move, the freeze is estimated to raise an extra £990m in revenue by tax year 2025/26.
Canada Life technical director Andrew Tully said: This measure simply sends the wrong signal to savers trying to do the right thing. It also penalises good investment performance. We already have annual limits on the amount you can save via a pension wrapper and there is a significant disparity between how defined contribution savers and those with defined benefit income are treated for lifetime allowance purposes.
The LTA has fallen from £1.8m to £1m over the last 10 years; stayed frozen at £1m; gradually increased by inflation, and now frozen once more.
Tully said the allowance was an “arbitrary tax” that hits DC savers.
He added: These continuous changes to pensions policy exacerbate the uncertainty many people feel around pension saving. Instead of constant tweaks, we need stability to give people confidence to save for the long-term.
Hargreaves Lansdown said the move was an “under the radar revenue raiser”
Senior analyst Nathan Long said: With Treasury pennies stretched, it’s understandable all angles are being explored, but this won’t just hit very high earners, committed and consistent pension savers risk running into the limit too and being punished for their efforts to save for the future.
In the short term, it looks like a tax raid on the public sector, where some higher-paid employees will see their generous defined benefit pensions caught up. In the longer term, this will essentially end up being a tax on those who are successful in growing their pension, Long said.
He said that a lifetime limit on the amount you can hold in pensions is of questionable value given we’re also limited as to what we can pay in each month. Rather than tinkering with the system to raise more cash, the government needs to look more holistically at tax on pensions and how to make it work better for everyone.