As part of his Spring Budget, announced today (March 15), the chancellor said the lifetime allowance will be scrapped to encourage people to stay in work longer.
The lifetime allowance charge will be removed from April 2023 before the allowance is abolished entirely from April 2024.
This is expected to cost the Exchequer £135mn in 2023-24, £210mn in 2024-23 and then £770mn, £800mn and £835mn in the three years that follow.
Currently, the lifetime allowance caps the total amount a person can save in a pension without having to pay an additional tax charge.
Under previous plans, the lifetime allowance was due to remain at £1.073mn up to and including the 2025/26 tax year.
The lifetime allowance has been hit by a series of cuts and freezes by the government since it peaked at £1.8mn.
After being introduced in April 2006 at £1.5mn, the lifetime allowance grew to £1.8mn in 2012 but was then cut to £1mn.
It then edged up in line with inflation to £1.055mn for 2019/20 before it reached its current level of £1,073,100 in 2020/21, where it has stayed for three years.
Each reduction in the lifetime allowance has resulted in the creation of a new set of ‘protections’, allowing some people to keep a higher personal lifetime allowance.
If a person breaches the lifetime allowance, a charge will be applied to the excess.
This charge will be 25 per cent if the money is left in the pension or 55 per cent if taken out of the pension.
It was originally expected that the chancellor would hike the lifetime allowance.
Claire Trott, divisional director for retirement and holistic planning at St. James’s Place, said: "The LTA abolition leads to a lot of questions, which I wonder if they will have been considered or thought about. This is a real win for many but I can see a lot of angry people who have been hit hard in recent years."
The chancellor also announced today that the annual allowance would increase by £20,000 to hit £60,000.