“Chancellor Rishi Sunak’s raid on the lifetime allowance was billed as an attack on pensioners in the build-up to last week’s Budget but in reality it could affect savers of all ages,” says Tom Selby, senior analyst at AJ Bell.
“People in their 20s and 30s might understandably have never considered the lifetime limit, but decent-sized contributions coupled with strong investment returns could pull young people into its orbit. Those in the later stages of their savings journey – and even people who have already started taking a retirement income – may also be at risk and need to factor in the lower lifetime allowance into their planning. This all assumes, of course, that the next Government will stick to the Chancellor’s word and restore the inflation link from 2026 onwards. If this doesn’t happen, the lifetime allowance will really start to bite on ordinary savers.”
The youngsters
“While the lifetime allowance might not seem an issue for savers in their 20s and 30s, those who enjoy strong investment growth while doing the right thing and make decent-sized pension contributions risk being caught in its net.
“A 25-year-old graduate who saves £500 a month* into their pension, for example, could hit the lifetime limit by age 66 if they enjoy investment growth of 8% a year post-charges. Whilst 8% investment growth a year sounds high, the MSCI world index has returned an annualised return of 8.32% since 1987**.
“For those in their 30s, the risk might be more as a result of being savvy when they were younger and squirreling away a tidy sum in their 20s.
“For example, a 35-year-old with a £150,000 retirement pot today who makes £500 a month pension contributions and enjoys 8% investment growth could breach the lifetime allowance by their 61st birthday.”
The midlife savers
“For people who only just start saving in their 40s and 50s, the lifetime allowance is unlikely to be a significant concern even after Rishi Sunak’s tax grab. However, savers in this age bracket who have built up a decent-sized pension should factor in the lifetime allowance freeze to their retirement strategy.
“A 40-year-old with a £300,000 fund today, less than half the lifetime allowance, might not be overly concerned about its impact on them. However, monthly contributions of £500 combined with 8% investment growth would see them crash through the lifetime allowance by their 58th birthday.
“Similarly, a 50-year-old with a £500,000 pension who made £500 a month contributions and enjoyed 8% investment growth would hit the lifetime allowance by their 61st birthday.”
The retirement investors
“For those in their 60s who might have stopped contributing to their pension the lifetime allowance freeze could still be a significant concern.
“Take a 60-year-old with a fund worth £700,000 today – over £300,000 shy of the current lifetime allowance. If they make no more contributions and enjoy 8% investment growth, they will hit the limit by age 66.
“Even those who have started taking an income need to take the lifetime allowance into account. This is because HMRC tests any growth you have enjoyed on your fund at age 75.”
Assumptions: lifetime allowance kept at £1,073,100 until 2025/26 and then increases in line with inflation assumed at the Government target of 2%; investment returns are post-charges throughout
*All contributions calculations are based on a £6,000 annual contribution, increasing each year by 2% inflation
**Source: https://www.msci.com/documents/10199/178e6643-6ae6-47b9-82be-e1fc565ededb
