• Savers will benefit from a 1.7% lifetime allowance increase next year, from £1,055,000 to £1,073,000, in line with September’s CPI inflation figure
• Lifetime allowance hike also means an extra £4,500 tax-free cash will be available in 2020/21
• Government is facing growing calls to radically simplify the pension tax system, including the lifetime and annual allowances
Tom Selby, senior analyst at AJ Bell, comments:
“The Government’s decision to peg the lifetime allowance to inflation in 2016 at least put a stop to years of cuts in retirement savings incentives by successive administrations.
“As a result, savers will benefit from an £18,000 boost in the lifetime allowance in 2020/21, allowing up to £4,500 in extra tax-free cash to be generated.
“Pressure for reform of the UK’s unwieldy pension tax system is now growing, however, with the Office for Tax Simplification the latest to throw its weight behind a fundamental review.
“In particular, the OTS suggests pensions allowances should be split so defined benefit scheme costs are controlled by a lifetime allowance, while defined contribution members would be subject to an annual allowance.
“This would certainly eradicate a huge amount of complexity for savers in DC schemes and could also help address problems facing high-earning NHS employees as a result of the taper, although there would inevitably be new complexities to address.
“If we do finally get a proper review of the pension tax rules it will be important to ensure any changes making life easier for savers without denting incentives.
“In addition, Government will need to find a way to ensure any simplification stands the test of time, which will likely require at least some level of cross-party commitment to long-term stability.”
