Pensions LTA to rise by 0.5% in 2020/21

The Pensions Lifetime Allowance is set to rise by £5,800 to £1,078,000 next year following news today of the latest CPI inflation rate of 0.5%. According to AJ Bell’s calculations the lifetime allowance will increase by 0.5% in 2021/22, in line with the latest Consumer Prices Index (CPI). The rise in the much-criticised Lifetime allowance will mean most savers will be entitled to take an extra £1,450 tax-free cash, says AJ Bell. AJ Bell says the current pensions lifetime allowance, if fully utilised, would buy a healthy 65-year-old an annuity paying less than £28,000 a year – below the average UK wage. Today’s CPI inflation number also means the state pension should rise by 2.5% next year, in line with the ‘triple-lock’ policy, five times the rate of inflation. Tom Selby, senior analyst at AJ Bell, said: “The pensions lifetime allowance will rise a bit next year, although with inflation subdued in September the increase will be just 0.5%. “This will result in an increase in the amount someone can save in a pension tax-free over their lifetime from £1,073,100 to £1,078,900, allowing most people to generate an additional £1,450 in tax-free cash. “While a lifetime allowance of over £1 million might sound like a king’s ransom, for a healthy 65-year-old it would buy a single-life annuity paying less than £28,000 (assuming full tax-free cash entitlement is taken) – a decent income but below the average salary in the UK. “The lifetime allowance has been cut repeatedly from a high of £1.8 million 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.” He said he hoped the government would address this issue. The increase to the State pension triple-lock should increase the value of the ‘old’ state pension from £134.25 a week to £137.65 a week, while the ‘new’ state pension is set to rise from £175.20 a week to £179.60 a week. Steve Webb, partner at pension consultants LCP said: “Despite low inflation and falling earnings, the triple lock policy is likely to lead to the main state pension rate rising by 2.5% next April, an increase of five times the rate of inflation. “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% or more. At that point we may see a more ‘flexible’ interpretation of the government’s manifesto commitment.”

Pensions LTA to rise by 0.5% in 2020/21

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