The pension lifetime allowance places a limit on the amount people are able to save into their pension pot tax-free each year. Before the policy change, Britons could expect the sum to increase by the rate of inflation each tax year. However, Chancellor Rishi Sunak made a change in last week’s Budget which means the lifetime allowance will be frozen until 2026.
The decision has been widely referred to as a stealth tax, for the way it is likely to impact pension savers who are near to their retirement.
But while those who are close to retirement may be impacted by this change, one expert has stated Britons of all ages may have some reason for concern.
Tom Selby, senior analyst at AJ Bell, commented on the matter, providing further insight into the impacts for savers.
He said: “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.
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Firstly, for younger savers, the pension lifetime allowance freeze could be a concern due to pension growth over a number of years.
If a 25-year-old individual saves £500 into their pension per month, according to AJ Bell analysis, they could reach the lifetime limit by age 66 if enjoying investment growth of eight percent per year – post-charges.
With the MSCI world index returning an annualised return of 8.32 percent since 1987 – this outcome is perhaps more real than it may originally seem.
There may also be issues for midlife savers who are working towards their retirement – individuals who are in their 40s and 50s.
While AJ Bell has stated the pension lifetime allowance may not be a “significant concern” the freeze should definitely be kept on their radar.
Individuals who have built up a sizeable pension pot may need to readjust their pension strategy in order to factor in the lifetime allowance freeze.
For example, a 50-year-old with a £500,000 pension, putting away £500 a month and enjoying an eight percent growth would reach the lifetime allowance by 61-years-old.
Finally, individuals who are in their 60s may also have cause for concern with the lifetime allowance – even if they have stopped contributing to their pension.
Mr Selby concluded: “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 eight percent 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.”
The pension lifetime allowance is set to be frozen until the 2025/26 tax year, after which it is expected to increase once again at the rate of inflation.
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