The pensions lifetime allowance is set to rise to £1,078,900 after inflation was confirmed at 0.5 per cent this morning.
The pensions LTA, which is currently set at £1,073,100, increases every year in line with the consumer price index figure, which was announced this morning (October 21).
The latest rise will mean most savers will be entitled to an extra £1,450 in tax-free cash in 2021/22.
The state pension, which is also linked to the index but is bound by a minimum rise of 2.5 per cent under the ‘triple-lock’ guarantee, will rise by the latter.
The LTA represents a limit on the amount of pension benefit that can be drawn from pension schemes without triggering an extra tax charge – whether in a lump sum or as ongoing retirement income.
According to AJ Bell, although a lifetime savings cap of more than £1m may sound like a lot to savers, based on current rates it would only buy a 65-year old an annuity of £28,000 a year, which is below the average UK wage.
Tom Selby, senior analyst at AJ Bell, said: “The lifetime allowance has been cut repeatedly from a high of £1.8m in 2011/12, 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.”
Triple lock boost
Today’s 0.5 per cent inflation figure confirms the state pension is expected to increase by 2.5 per cent next April, marking three years in a row where it has increased by more than inflation.
It means the new flat rate state pension will rise by £4.40 a week to £179.60 and anyone on the old system will receive £3.40 more a week at £137.65.
Under current rules, the state pension is increased by the ‘triple lock’ which is the highest of earnings growth, price inflation or a 2.5 per cent minimum guarantee.
The growth in average earnings in the May-July quarter was announced at minus 1 per cent.
Because this was negative, the government had to pass a short piece of legislation (the Social Security (up-rating of benefits) Bill) to give it powers to pay any increase in pensions next April, according to Steve Webb, partner at LCP.
Mr Webb said: “Given that the UK state pension is still low by international standards, the chancellor may feel justified in going ahead with such an increase.
"He will however face a bigger challenge next year if earnings bounce back and if the triple lock policy would imply an increase of 5 per cent or more.