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Maximum tax-free pension savings amount to rise next year

Paloma Kubiak
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Paloma Kubiak

The pension lifetime allowance is set to rise from April next year, meaning more money can be saved without paying tax.

The lifetime allowance (LTA) is the maximum amount of pension savings you can build up without a tax charge.

It currently stands at £1,073,100 but this figure will rise by £5,800 to £1,078,900 in the new tax year in April (2021/22).

This is because any changes are based on the September Consumer Prices Index (CPI) figures which were published today.

As such, savers will be entitled to an extra £1,450 tax-free cash, according to AJ Bell. But despite the figure standing at a healthy amount above £1m, when it comes to selecting an annuity, retirees could receive less income than the average UK wage.

Tom Selby, senior analyst at AJ Bell, said: “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 £1m 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.”

Selby added that while it may not be a priority for the government to deal with the pension tax system’s complexity, he hopes these issues will be addressed at some point.

“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,” he said.