The UK Government has been promoting private pensions as a way for you to save for retirement. It also helps reduce dependence on state provisions. However, private pensions are subject to taxation and the Lifetime Allowance (LTA) has remained frozen since April 2021. The LTA is a limit on the amount of pension savings you can have without incurring an additional tax charge. The current LTA is set at £1,073,100.
Understanding the charge and taxation related to the LTA can be complicated, so keep reading to learn more.
Before April 2021. the LTA increased annually by the rate of inflation, as measured by the Consumer Price Index (CPI). However two changes have made LTA planning a more immediate issue for UK savers:
- The UK government decided to freeze the Lifetime Allowance until at least 2025/26 (following the onset of the pandemic). This means that any capital appreciation of a pension fund, for those at or above their LTA, will increase their LTA charge.
- As the global economy has started to re-open, supply chains have struggled and bottlenecks have emerged. Combined with the war in Ukraine, this has exacerbated pre-existing price pressures, resulting in significantly higher inflation than past decades.
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The chart overleaf compares the MSCI World Equity Index (A) against UK inflation (B) while the LTA increased with inflation (2018/19 – 2020/21). There has been significant equity outperformance over this period. The LTA uplift, while welcome, has only provided a small level of protection. Meanwhile, increasing number of savers are seeing their pension values exceed the LTA.
The Inflation rate in those years was 3% in 2018/19, 2.4% in 2019/20 and 1.7% in 2020/21. From the 2021/22 tax year, the LTA was frozen. Even if indexation offers only partial protection, with the Bank of England forecasting UK inflation of 10% by the years end, the four-year freeze on the LTA will see a material decline in the real (inflation adjusted) value of the pension limit. As a result, more and more pension funds could be subject to the LTA charge.
It’s tough to predict what inflation will be in the future. However, it seems like the current high levels will take a while to go down. With the Lifetime Allowance frozen for 4 years, it’s likely that the UK’s Consumer Price Index (CPI) will continue to lower the real value of your pension savings.
That’s why many people are taking a closer look at the LTA aspect of their pension plans. At Bentley Reid, we understand how important this is, which is why we’ve created a set of guides to help you make informed decisions.
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Lifetime Allowance Guides
Read our guides below and if we can help in anyway or if you want to learn more about anything please get in touch