In the March 2021 Spring Budget, the Chancellor confirmed that the Lifetime Allowance (LTA) will be frozen at £1,073,100 until April 2026.
The LTA was planned to increase by CPI each year as it has done since 2018/2019. The annual increases now won’t take place until at least April 2026.
The change has little immediate impact as due to low inflation the LTA was only expected to increase by around £5,800 in 2021/22.
A much bigger issue will be the removal of future increases. If the LTA had continued to be uplifted with inflation it would be around £1.22m by April 2026. It will now be around £150,000 less than this. This means pension savers would miss out on up to £37,500 of extra tax-free cash. They could also pay the same figure in Lifetime allowance charges. Estimates are that one in ten pension savers will be affected by these changes.
Did anything else change?
The good news is that all the other benefits or pensions remain. Personal pension tax relief is unchanged, growth on assets within a pension is free of tax, 25% tax-free cash is still available, and most pension funds sit outside of the estate for inheritance tax purposes.
Also, there are no changes to the annual allowances or tapered annual allowance income limits.
What was said about the freeze?
The announcement that the LTA will be frozen until 2026 has been met with a negative response in the industry. Most have called for a more fundamental review of the taxation of pensions.
The Spring 2021 Budget saw the announcement that the Lifetime Allowance (LTA) will be frozen at £1,073,100 until 5 April 2026. The LTA was due to increase with CPI each year as it has done since 2018.
One of the biggest concerns raised was on the NHS. One year ago, the Chancellor revised the rules around how much high earners can put into a pension each year. This change was primarily made to prevent senior NHS staff from reducing their hours or even retiring earlier than originally planned. It seems odd to change another allowance that could have the same effect.
Shortly following the Budget, the British Medical Association (BMA) issued a Press Release setting out the findings of a survey it conducted of more than 7,000 doctors, which reveals that many now plan to leave the NHS before their expected normal retirement age. You might expect this to be a cause for Government concern at the best of times but particularly during a pandemic that has created a huge backlog of patients to be treated even once we are through the worst of COVID.