Out-Law News | 18 Mar 2015 | 3:55 pm | 1 min. read
From April 2016, the lifetime allowance (LTA) will be lowered from £1.25 million to £1m, reflecting the "unsustainable" cost of pension tax relief to UK public finances, according to the chancellor of the exchequer. However, this new limit will be increased annually in line with the consumer prices index (CPI) measure of inflation since 2018 "to ensure those still building up their pension pots are protected from inflation", he said.
Pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com said that capping the LTA at £1m would begin to impact on "senior teachers and senior nurses", amongst other professional workers on moderate incomes.
"It also hurts DC savers disproportionately compared to those benefiting from defined benefit (DB) schemes, such as civil servants," he said. "This is because the method for measuring DB rights against LTA is more generous. Osborne's justification - that the cost of tax relief to the exchequer has continued to go up in recent years – is not a reason to cut how much you can save into pensions. It's a reason to celebrate the success of auto enrolment."
However, linking the LTA to the CPI from 2018 should "partially offset" the policy announcement by preventing the allowance from shrinking over time, he said.
The announced cut is the third time that the LTA has been reduced since April 2006, when it stood at £1.8m. However, the chancellor has ruled out cutting the annual allowance on pension saving from £40,000, saying that doing so would be "neither progressive nor fair" and would penalise moderately paid workers.
Pension savings that exceed the LTA are subject to a tax charge of up to 55% when members access their benefits.
Income tax relief for pension savings cost the government around £34.3 billion in 2013/14, up from £30.8bn in 2009/10, according to the 2015 Budget document. An estimated 10 million people are expected to begin saving more towards their retirement or saving for the first time by 2018, when all UK employers will be required to automatically enrol qualifying workers into a pension scheme.