Sunak set to freeze pensions lifetime allowance for the rest of this Parliament

Tom Selby
26 February 2021

•    Chancellor Rishi Sunak will announce a freeze in the lifetime allowance at £1,073,100 for the rest of this Parliament, the Times reports (https://www.thetimes.co.uk/article/budget-2021-rishi-sunak-tax-raid-pensioners-lifetime-allowance-jjjnx7swl)

•    Lifetime allowance had been expected to rise by £5,800 in 2021/22, in line with 0.5% Consumer Prices Index inflation
•    Stealth tax expected to raise £250 million a year by 2024
•    Savers need clarity from Treasury about when the lifetime allowance inflation link will be restored

Tom Selby, senior analyst at AJ Bell, comments: 

“Given the damage wrought by Coronavirus to the nation’s collective balance sheet over the past 12 months, it was inevitable all areas of Government spending – including retirement saving incentives – would come under the Chancellor’s microscope.

“The decision to scrap lifetime allowance inflation protection for the rest of this Parliament is likely less about the modest 0.5% rise in the lifetime allowance due to kick in from April this year and more about rises in subsequent years. 

“If we see a vaccine-inspired spending boom in the UK this summer, for example, inflation could be pushed northwards - and so too would the lifetime allowance under current legislation. By freezing the lifetime allowance as inflation spikes, the Chancellor will stealthily drag thousands more people into his tax net.

“Among those to be hit by this move will be NHS doctors who benefit from generous defined benefit pensions. Furthermore, the longer the lifetime allowance is kept at its current level, the more of middle Britain will be dragged into its orbit.”

“If the Chancellor does freeze the lifetime allowance at the Budget, savers will be looking for clarity on when the inflation link will be returned so they can continue to save for the future with confidence.”

What can £1 million get you in retirement

“Although £1 million might sound like a huge pension pot, when you stretch that over the course of a retirement that might last 30 years or more it becomes far more modest.

“Take a healthy 66-year-old with a £1 million pot who takes their 25% tax-free cash entitlement and uses the remaining £750,000 to buy a single-life, inflation-protected annuity. 

“At current rates, that pot might buy a guaranteed income for their rest of their life worth around £29,000* – enough for a comfortable standard of living perhaps, but only on par with the average UK wage**.

“Alternatively, someone with a £750,000 fund in drawdown who enjoys 4% investment growth per year could enjoy an income of around £32,000 for 30 years***.”

*Source: Money Advice Service annuity calculator, annual inflation of 2% per annum assumed (quote obtained on 26 February 2021)
**Source: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/latest
***Source: AJ Bell calculations – assumes income rises in line with 2% inflation each year

Tom Selby
Senior Analyst

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.

Contact details

Mobile: 07702 858 234
Email: tom.selby@ajbell.co.uk

Follow us: