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LTA to see £5,800 increase in 2021 on 0.5% inflation figure

21 October 2020

retirement plan

The pensions Lifetime Allowance is set to rise just 0.5% in line with the September inflation figures. 

This will see the current Lifetime Allowance (LTA) rise by £5,800 to £1,078,000 next year, meaning most savers will be entitled to an extra £1,450 tax-free cash.

According to Tom Selby, senior analyst, AJ Bell, while a Lifetime Allowance of over £1 million 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 – below the average salary in the UK.

“The lifetime allowance has been cut repeatedly, creating unwelcome complexity on the way, punishing those who enjoy strong investment growth and causing particular problems for long-serving public sector workers.

“Although clearly dealing with unnecessary complexity in the pension tax system is not a priority at the moment, at some point we hope the Government will address these issues. 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.”

Andrew Tully, technical director, Canada Life, added: “Another small increase in the amount people can save into a pension before being hit by the lifetime allowance is helpful and will present new financial planning opportunities.

“However, it again highlights the complexity of having restrictions as people make pension contributions and restrictions when people take benefits. Simply scrapping the lifetime allowance and letting the annual allowance do its job would simplify the system and not penalise those people who benefit from good investment growth.”

Meanwhile, the state pension is set to rise by 2.5% next April under the ‘triple lock’ guarantee.

Introduced in 2011 by the coalition Government, the ‘triple lock’ guarantees to uprate the basic state pension by the highest of earnings, inflation or 2.5%.

With inflation for September increasing by 0.5%, and earnings growth falling by 1% between May and July, retirees are in line to receive the 2.5% boost to their pensions in the 2021/22 tax year.

This should increase the value of the ‘old’ state pension from £134.25 a week to £137.65 a week, while the ‘new’ state pension is set to rise from £175.20 a week to £179.60 a week.

It will be the fourth time that the minimum uplift has been used since the ‘triple lock’ was introduced.

Andrew Tully at Canada Life, said the inflation-busting increase will provide a “welcome boost” for many retirees looking to balance household budgets during the pandemic.

Tully said: “It further highlights the value of the triple lock with pensioners getting an increase well above both earnings growth and inflation. Despite what many may consider to be a generous uplift in the State Pension, the UK system remains one of the least generous in the western world.

“Any future attempt to reduce the value of the uplift by moving to a double-lock or some other mechanic would risk a serious retirement rebellion from millions of voters and any Government would be foolish to ignore that.”

However, Steven Cameron, pensions director, Aegon, warned that the 2.5% rise will raise concerns over both the affordability and intergenerational fairness of maintaining the triple lock, particularly as the Government looks to balance the books in the wake of the Covid-19 pandemic.

Cameron commented: “The state pension is not funded in advance but on a ‘pay as you go’ basis from today’s workers’ National Insurance contributions. The Chancellor will no doubt be facing difficult decisions over whether he can afford to retain the triple lock as he supports the economy through wave two of the pandemic and looks ahead to getting the nation’s finances back on track.”

 

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