On the go: The pensions lifetime allowance is set to rise to £1,078,900 after inflation was confirmed at 0.5 per cent this morning.
The pensions LTA, currently set at £1,073,100, increases every year in line with the consumer price index. The latest rise will mean most savers will be entitled to an extra £1,450 in tax-free cash in 2021-22.
The state pension, which is also linked to the index but is bound by a minimum rise of 2.5 per cent under the ‘triple-lock’ guarantee, will rise by the latter.
The LTA represents a limit on the amount of pension benefit that can be drawn from pension schemes without triggering an extra tax charge – whether in a lump sum or as ongoing retirement income.
According to AJ Bell, although a lifetime savings cap of more than £1m may sound like a lot to savers, based on current rates it would only buy a 65-year old an annuity of £28,000 a year, which is below the average UK wage.
Tom Selby, senior analyst at AJ Bell, said: “The lifetime allowance has been cut repeatedly from a high of £1.8m in 2011-12, creating unwelcome complexity on the way, punishing those who enjoy strong investment growth and causing particular problems for long-serving public sector workers."
Wednesday’s 0.5 per cent inflation figure confirmed the state pension is expected to increase by 2.5 per cent next April, marking three years in a row where it has increased by more than inflation. It means the new flat rate state pension will rise by £4.40 a week to £179.60 and anyone on the old system will receive £3.40 more a week at £137.65.
Under current rules, the state pension is increased by the ‘triple lock’ which is the highest of earnings growth, price inflation or a 2.5 per cent minimum guarantee.
The growth in average earnings in the May-July quarter was announced at minus 1 per cent. Because this was negative, the government had to pass a short piece of legislation (the Social Security (up-rating of benefits) Bill) to give it powers to pay any increase in pensions next April, according to Steve Webb, partner at LCP.
Mr Webb said: “Given that the UK state pension is still low by international standards, the chancellor may feel justified in going ahead with such an increase.
"He will however face a bigger challenge next year if earnings bounce back and if the triple lock policy would imply an increase of 5 per cent or more.
"At that point we may see a more ‘flexible’ interpretation of the government’s manifesto commitment.”
