The industry is critical of the chancellor's move to freeze the pension lifetime allowance until 2026, saying it is “a tax on good investment decisions".
At yesterday's Budget Rishi Sunak said the LTA would remain at its current level of £1,073,100 until 2026 rather than increase in line with inflation.
It had been expected to rise by £5,800 in the coming year, in line with a 0.5 per cent increase to the Consumer Prices Index.
The financial impact of the measure – intended to tackle the UK’s growing expenditure deficit - is estimated at an additional tax income of £80m in 2021/2022, rising to £300m in 2026/2026, cumulatively totalling £1bn.
Claire Trott, head of pensions strategy at St. James’s Place, said: “Fixing the pensions lifetime allowance until 2026 will envelope more people into the tax charges and so it’s effectively a tax on good investment decisions.
“This is really disappointing news for pensioners, whose savings will hopefully continue to grow, but as a result they’ll end up paying more back to the taxman.
“On top of this, the freeze not only impacts lifetime benefits but for those with uncrystallised funds on death it will also have an effect, with beneficiaries paying any excess charges from the funds left to them."
James Riley, president of the Society of Pension Professionals and partner at pensions advisory Isio, said the move “seems a politically easy decision” as it costs people nothing now.
However, Riley said the trouble lies in the worsening inequality between direct benefit and direct contribution pensions.
“In the DB world, a lifetime allowance of £1m equates to a sizeable pension in excess of £50,000 per annum. However, in a DC world, and based on current annuity rates, £1m buys a pension of just £22,500 per annum, less than half of what DB members receive," he said.
“This effectively penalises DC members with considerably more modest retirement incomes. With DC members typically younger than those in DB schemes, this is a further financial hit to the younger generations who are already the financially hardest hit by the pandemic.”
But Allistair Cunningham, financial planning director at Wingate Financial Planning, said the Budget announcement did not exaggerate the existing inequalities between direct benefit and direct contribution pensions.
He said: “I do think the LTA should be abolished immediately for DC pots, and equally the annual allowance should be abolished for DB, but that has been the case for the last 10 years – it now seems, with hindsight, the pre-2006 rules were adequately simple and imminently fair.”
Tom Selby, senior analyst at AJ Bell, said the retirement aspirations of future generations would also be negatively affected by the existing rate.
“The impact will depend in part on what happens to inflation over the next four years. If CPI were to rise in line with official OBR forecasts, it would imply an increase in the lifetime allowance of around £85,000 by 2025/26.”