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Plan ahead – there is a freeze coming from 2021 to 2026.

Legislation will be introduced in Finance Bill 2021 to remove the annual lifetime allowance link to the Consumer Price Index increase for the next five fiscal years.

This change will maintain the standard lifetime allowance of £1,073,100 for tax years 2021/2022 to 2025/2026.

As the lifetime allowance is not reducing there is no need for transitional protection regimes.

The lifetime allowance link to the CPI increase was announced at March budget 2015 and confirmed at summer budget 2015. The lifetime allowance has increased in line with the CPI for tax years 2018/2019, 2019/2020 and 2020/2021.

Freezing the lifetime allowance by removing the link to the CPI increase will have effect for the tax year 2021/2022 through to 2025/2026. The change will be effective from 6 April 2021.

The lifetime allowance is the maximum amount of tax relieved pension savings that an individual can build up over their lifetime. The standard lifetime allowance is £1,073,100. Tax relief on any pension benefits taken over this amount is recovered by the application of the lifetime allowance charge to the excess, which is charged at 25% if the excess is taken as a pension or 55% if it is taken as a lump sum (sections 214 to 216 of FA 2004).

The lifetime allowance also applies to any savings individuals have built up with UK tax relief where they are a relieved member of a relieved non-UK pension scheme (paragraphs 13 to 19 of Schedule 34 to FA 2004).

The maximum tax-free lump sum that an individual can normally have is 25% of their pension rights subject to an overall maximum of 25% of the standard lifetime allowance (paragraphs 1 to 3A of Schedule 29 to FA 2004).

The lifetime allowance was previously reduced in FA 2011 and FA 2013. To protect individuals who thought they would be affected by the reductions, transitional protection regimes were introduced.

The lifetime allowance only affects those with the largest pension pots – 95% of savers approaching retirement are currently unaffected by it. This measure maintains the standard lifetime allowance and could impact individuals who have pension wealth close to this limit when they are approaching retirement, as well as those individuals who have pension wealth over this limit when they retire. These individuals may have been expecting the lifetime allowance to continue to increase when the CPI increases, so this may influence their pension savings behaviour.

Where individuals now breach the lifetime allowance, some may reduce their hours or retire earlier than they want to, to stay within the lifetime allowance. If individuals breach the lifetime allowance, they will have a lifetime allowance tax charge, so that could reduce their income. Some individuals may be affected more than others depending on their income levels and family circumstances.

This article has been shared from ACCA In Practice, to whom copyright belongs.  Whitefield Tax are an ACCA Member Firm