Lifetime Allowance policy making financial planning ‘impossible’ - Budget 2021

In recent years, the government has had a series of different policies regarding the Lifetime Allowance.

When it was first introduced in 2006 it was increased each year but from 2010 onwards it was cut back dramatically in three stages from £1.8m to £1.5m to £1.25m to £1m. Following this it was frozen at £1m, before a policy of linking it to inflation was introduced. Today in the Budget, the Chancellor has reverted to freezing the LTA, changing the policy yet again.

Commenting, LCP partner and tax specialist Karen Goldschmidt said:

“The constant changes in policy on the lifetime allowance makes financial planning impossible. Although the tax amounts involved could initially be relatively marginal, the numbers could grow rapidly if the limit is frozen for the long-term. Savers for retirement expect the value of pension they have built up to grow at least in line with inflation before they draw it, and freezing the allowance does not recognise that. As a result of this new policy, investors may need to rethink when and how they use their funds. This could include those who have recently transferred out their old final salary pensions thinking they would stay within the lifetime allowance but could now go above it. This change and the wider-hitting complexity could also lead to unwelcome behavioural changes including some senior NHS staff choosing to retire. This measure is all about responding to a short-term fiscal crisis rather than about having a long-term and stable framework for the taxation of pensions.”

Karen Goldschmidt added:

“Members with previously built-up rights from Defined Benefit schemes need to see if the freezing of the LTA might affect them. If their deferred pensions are linked to inflation, they will steadily build up a larger share of a frozen LTA and some deferred members who assumed they would be under the allowance could find themselves affected at retirement, or on future transfer out to use flexibilities.”