• The pensions lifetime allowance is set to increase by just 0.5% in 2021/22, in line with the Consumer Prices Index (CPI) inflation figure published today
• Lifetime allowance expected to rise by £5,800 to £1,078,900 next year*, meaning most savers will be entitled to an extra £1,450 tax-free cash
• While a lifetime pension savings cap of over £1 million might sound like a lot, based on current rates it would buy a healthy 65-year-old an annuity paying less than £28,000 a year – below the average UK wage**
• Today’s CPI inflation number also means the state pension should rise by 2.5% next year, in line with the ‘triple-lock’ policy
Tom Selby, senior analyst at AJ Bell, comments:
“The pensions lifetime allowance will rise a bit next year, although with inflation subdued in September the increase will be just 0.5%.
“This will result in an increase in the amount someone can save in a pension tax-free over their lifetime from £1,073,100 to £1,078,900, allowing most people to generate an additional £1,450 in tax-free cash.
“While a lifetime allowance of over £1 million might sound like a king’s ransom, for a healthy 65-year-old it would buy a single-life annuity paying less than £28,000 (assuming full tax-free cash entitlement is taken) – a decent income but below the average salary in the UK.
“The lifetime allowance has been cut repeatedly from a high of £1.8 million 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.
“Although clearly dealing with unnecessary complexity in the pension tax system is not a priority at the moment, at some point we hope the Government will address these issues.
“We know complexity combined with constant moving of the goalposts puts people off saving for their future, something which as a country we need to be encouraging more people to do.”
State pension triple-lock confirmed
“With inflation at 0.5% and average earnings in the three months to July negative, the 2.5% triple-lock underpin looks set to kick-in from April next year.
“This should increase the value of the ‘old’ state pension from £134.25 a week to £137.65 a week, while the ‘new’ state pension is set to rise from £175.20 a week to £179.60 a week.
“This might not seem a significant boost, but in the context of a Coronavirus-ravaged economy where unemployment is rising and millions have been forced to take a pay cut, the value of the triple-lock has never been clearer.”
*Calculation based on September increase in CPI to 3 decimal places (the methodology used in 2019/20)
**Quote sourced from Money Advice Service annuity calculator on 20/10/2020. Maximum tax-free cash entitlement based on 2020/21 lifetime allowance of £1,073,100 (£268,275) taken, with remaining £904,825 used to buy a single-life annuity. Income rises each year by 2.5%, in line with the Bank of England’s CPI inflation target
