Nearly one year after the Covid-19 pandemic forced the UK into a national lockdown – the Chancellor has revealed the pensions policy changes in the UK’s March Spring Budget 2021.
As well as holding basic and higher rate tax thresholds until April 2026, the Pensions Lifetime Allowance (LTA) will be frozen at £1.07 million over the same period.
The Lifetime Allowance is the upper limit on the total value of pay outs that can be taken from all of your pension schemes without a tax penalty.
There is no limit on the benefits an individual can receive – or ‘crystallise’ from registered pension schemes. However, there is an overall limit of tax privileged pension funds a member can accrue during their lifetime – called the ‘Lifetime Allowance’ (LTA)
When a member takes certain benefits, and at some other times (such as attaining the age of 75 or on death before 75) the amount of LTA they have used is tested.
When the members’ benefits, along with any other benefits they have taken, are over the LTA, a ‘Lifetime allowance charge’ is applied to the value, in excess of the LTA.
Savers who exceed the lifetime allowance will incur 25% tax levies on the excess withdrawn from their pension pots if taken as income, as well as charges of 55% LTA tax if they draw down lump sums.
The Chancellor has confirmed that the pensions Lifetime Allowance, will remain at its current level rather than increasing in line with inflations previously expected.
It had been expected to rise by £5,800 in 2021/22, in line with 0.5% Consumer Prices Index.
Legislation will be introduced in the Finance Bill 2021 to remove the annual link to the Consumer Price Index increase for the next 5 fiscal years.This will maintain the standard Lifetime Allowance at £1,073,100 for tax years 2021 to 2022 to 2025 to 2026.
If the lifetime allowance rose alongside inflation it would increase by a further £88,900 by the end of the current parliament.
The freeze will impact those with Defined Benefit pensions as well as those with Defined Contribution pensions.
While a pension pot of £1m may feel like a significant sum of money it has to last throughout retirement. So while £1,073,100 may look like a large fund, it would typically buy an income for life for someone aged 65 of around £26,100 a year, increasing in line with inflation before tax.
And a prolonged period of no inflationary increases will quickly reduce that income in real terms and could further affect confidence in pensions.
The freeze is estimated to net the Treasury an additional £250m in tax.
There are a number of different LTA protections available that can be used to increase your lifetime allowance if you qualify for protection.
If you qualify for Individual Protection of Fixed Protection you could be able to increase your personal LTA up to a maximum of 1.25million. Or, If you have worked offshore/outside of the UK, while you were contributing to a defined contribution scheme or while a member of a final salary scheme, you could be eligible to increase your lifetime allowance to a level higher than 1.25m by applying for the Non Resident Enhancement Factor.
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