State Pension and Lifetime Allowance to rise next year
Rising inflation can be a cause of concern for UK consumers. But for pensioners, high inflation, particularly for September, can be good news. The all-important September Consumer Price Index (CPI) measure of inflation sets the annual rise in the State Pension and the Lifetime Allowance.
Since 2010, the State Pension has risen annually by the highest of inflation, earnings growth or 2.5% under the ‘triple lock’ guarantee.
As the September CPI figure is the largest of the three, the 3% rise will apply to both the new flat rate State Pension and the old basic State Pension. This means those on the flat rate State Pension will see weekly earnings rise from £159.55 per week to £164.35 per week (£8,546.20 a year). Those on the basic State Pension will get £125.95, up from £122.30 per week. The triple lock is guaranteed until 2020.
Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “The State Pension provides a bedrock of retirement income for everyone and is critical to the successful function of our pension system.
“Not only is the increase important for those who are receiving their pension, it also helps those on the run in to retirement to plan with increasing accuracy. If you are in your 50s you can reasonably start thinking about what you might spend in retirement. Split your retirement spending into essentials like food, heating and clothing and non-essentials like holidays and meals out. Ideally you should have enough secure income from your State Pension, any Final Salary Pensions or an annuity to cover the non-essential spending.
“It is never too late to squirrel monies away for life after work but the first step is to plan.”
The Lifetime Allowance (LTA) is the maximum amount of pension savings you can build up without a tax charge.
This figure was cut from £1.25m to £1m on 6 April 2016 but has previously been as high as £1.8m. From April 2018, it will rise from £1m to £1,030,000. This is the first rise in the LTA since 2006.
Savers who exceed the allowance are charged either 25% tax on the excess if they withdraw the money as income, or 55% if it is withdrawn as a cash lump sum. See YourMoney.com’s How to avoid the Lifetime Allowance charge for more information.
Pension savers forked out nearly £126m in tax for breaching the £1.25m lifetime allowance in 2015/16, figures from HM Revenue & Customs (HMRC) revealed, meaning with the lesser allowance, a larger proportion of middle earners, many of whom think they have accumulated far less than £1m, risk receiving an unexpected tax bill.
As such, the government announced it would increase the LTA in line with September’s CPI figure. Hargreaves Lansdown calculated that the LTA increase would help cut the excess tax charge for breaching the LTA by up to £16,500, adding that it could also increase savers’ tax free cash by £7,500.
Kate Smith, head of pensions at Aegon, added: “This month’s inflation figure is uniquely important because it is used by the government to calculate the rise in the Lifetime Allowance (LTA) for the first time. The increase for the LTA in 2018/19 will be £1,030,000 based on today’s figures, and following a series of reductions it is welcome that the base-level is set to start growing again, even if on the surface the numbers aren’t large. Despite being small, this is a complex area, so those affected should seek financial advice to make sure their pension is protected from additional tax charges.”