The lifetime allowance, the amount people can build up in their pension pot before incurring punitive tax charges, is frozen until April 2026 at its current level of £1,073,100.
It had been expected to rise in line with inflation.
The decision means more people risk being dragged over the threshold and could face a 25% levy on any additional income from their pension pot. The charge rises to 55% if they choose to draw down a lump sum.
How many will be affected?
The additional charge would mean about 10,000 people with larger pensions could pay more than £22,000 extra in tax by 2024.
Analysts believe the measure could be worth £250million a year to the Treasury.
Over a million pounds in pension savings might sound a lot, but over a retirement lasting 30 years or longer it could pay you less than the average UK salary.
The freeze could penalise those savers who sacrifice more of their salary to retirement savings or whose pension investments perform particularly well.
The lifetime allowance on pensions, which was introduced in 2006, was repeatedly cut by George Osborne when he was Chancellor. In 2011 he reduced it from £1.8million to £1.5million, before cutting it £1.25million in 2014 and £1million the following year.
It was subsequently frozen before being indexed to inflation and over the course of this parliament it was due to rise to £1.17million.
Inheritance Tax
Other disappointing moves on the personal finance front announced today included Inheritance Tax thresholds staying at their current levels until April 2026.
At the moment, there's normally no Inheritance Tax to pay if either:
- The value of your estate is below the £325,000 threshold.
- You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.
Meanwhile, the adult ISA annual subscription limit for 2021-22 will remain unchanged at £20,000.
Based on tax legislation at the time of publication. Please be aware that there will have been changes since this was published. Speak to your adviser for the most up to date information.
