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Budget 2021: Pension lifetime allowance frozen

John Fitzsimons
Written By:
John Fitzsimons

The amount that you can save in a pension over your lifetime, without being charged tax, has been left unchanged in the 2021 Budget.

Rishi Sunak, the Chancellor of the Exchequer, opted to freeze the lifetime allowance at its current level of £1,073,100.

This freeze is not simply a short-term measure either, with the allowance remaining at this level until April 2026.

Sending the wrong signal

It’s a move that was swiftly criticised by those within the pensions industry, with Steven Cameron, pensions director at Aegon, warning that it risks sending the wrong signal about the benefits of saving as much as you can for retirement.

He pointed out that while the current lifetime allowance appears to be significant, it would typically buy an income of £26,100 a year for a 65-year-old, the equivalent of £1,740 a month after tax which “is not exactly enough to provide a lifetime of luxury”.

He added: “Freezing the limit means more individuals, many of whom are not particularly wealthy, have a heightened risk of exceeding the limit and facing a hefty tax charge. Some may have been simply seeking to do the right thing over many years but because of achieving good investment growth in their defined contribution pension, end up above the limit.  

This was echoed by Claire Trott, head of pensions strategy at St James’s Place, who described it as “effectively a tax on good investment decisions”.

She added: “This is really disappointing news for pensioners, whose savings will hopefully continue to grow, but as a result they’ll end up paying more back to the taxman. On top of this, the freeze not only impacts lifetime benefits but for those with uncrystallised funds on death it will also have an effect, with beneficiaries paying any excess charges from the funds left to them.”