Setting the standard Lifetime Allowance from 2021 to 2022 to 2025 to 2026
Published 3 March 2021
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Who is likely to be affected
Individuals whose total UK tax relieved pension savings are near to or more than £1,073,100.
Employers who contribute to registered pension schemes on behalf of their employees.
Scheme administrators of registered pension schemes and advisors with clients who have UK tax relieved pension savings.
General description of the measure
This measure removes the annual link to the Consumer Price Index increase for the next 5 fiscal years and so maintains the standard lifetime allowance at £1,073,100 for tax years 2021 to 2022 to 2025 to 2026.
Policy objective
To support the government’s objective of a system of pensions tax relief that is fair, affordable and sustainable.
Background to the measure
The lifetime allowance link to the Consumer Price Index increase was announced at March Budget 2015 and confirmed at Summer Budget 2015.
The lifetime allowance has increased in line with the Consumer Price Index increase for tax years 2018 to 2019, 2019 to 2020 and 2020 to 2021.
Detailed proposal
Operative date
Freezing the lifetime allowance by removing the link to the Consumer Price Index increase will have effect for the tax year 2021 to 2022 through to 2025 to 2026. The change will be effective from 6 April 2021.
Current law
The current pensions tax rules for registered pension schemes came into force on 6 April 2006 (A-day) and are set out in Part 4 of the Finance Act 2004. Although there are no limits to how much can be saved in registered pension schemes, there is an annual and lifetime limit on the total amount of tax-relieved pension savings that an individual can have.
The lifetime allowance is the maximum amount of tax relieved pension savings that an individual can build up over their lifetime. The standard lifetime allowance is £1,073,100. Tax relief on any pension benefits taken over this amount is recovered by the application of the lifetime allowance charge to the excess, which is charged at 25% if the excess is taken as a pension or 55% if it is taken as a lump sum (sections 214 to 216 of FA 2004).
The lifetime allowance also applies to any savings individuals have built up with UK tax relief where they are a relieved member of a relieved non-UK pension scheme (paragraphs 13 to 19 of Schedule 34 to FA 2004).
The maximum tax-free lump sum that an individual can normally have is 25% of their pension rights subject to an overall maximum of 25% of the standard lifetime allowance (paragraphs 1 to 3A of Schedule 29 to FA 2004).
The lifetime allowance was previously reduced in FA 2011 and FA 2013. To protect individuals who thought they would be affected by the reductions, transitional protection regimes were introduced.
Proposed revisions
Legislation will be introduced in Finance Bill 2021 to remove the annual lifetime allowance link to the Consumer Price Index increase for the next 5 fiscal years. This change will maintain the standard lifetime allowance of £1,073,100 for tax years 2021 to 2022 to 2025 to 2026.
As the lifetime allowance is not reducing there is no need for transitional protection regimes.
Summary of impacts
Exchequer impact (£m)
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
|---|---|---|---|---|---|
| -10 | +80 | +150 | +215 | +255 | +300 |
These figures are set out in Table 2.1 of Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2021.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
The lifetime allowance only affects those with the largest pension pots – 95% of savers approaching retirement are currently unaffected by it. This measure maintains the standard lifetime allowance and could impact individuals who have pension wealth close to this limit when they are approaching retirement, as well as those individuals who have pension wealth over this limit when they retire. These individuals may have been expecting the lifetime allowance to continue to increase when the Consumer Price Index increases, so this may influence their pension savings behaviour.
Where individuals now breach the lifetime allowance, some may reduce their hours or retire earlier than they want to, to stay within the lifetime allowance. If individuals breach the lifetime allowance, they will have a lifetime allowance tax charge, so that could reduce their income. Some individuals may be affected more than others depending on their income levels and family circumstances.
Customer experience is expected to stay broadly the same because maintaining the lifetime allowance limit will not change when and how the individual will need to interact with HMRC.
Equalities impacts
The measure will have a greater effect on those later in life and closer to retirement than those in other age groups.
The measure may impact more men than women because more men typically have greater pension savings.
No other impacts are anticipated in respect of groups sharing other protected characteristics.
Impact on business including civil society organisations
This measure is expected to impact pension schemes and employers who will need to provide up to date information and guidance to individuals affected.
One-off costs will include familiarisation with the changes.
There is not expected to be any continuing costs.
This measure is not expected to impact on civil society organisations.
Customer experience is expected to stay broadly the same because maintaining the lifetime allowance limit will not change when and how the pension scheme will need to interact with HMRC.
Operational impact (£m) (HMRC or other)
There will be no additional costs for HMRC to administer this measure.
Other impacts
Other impacts have been considered and none has been identified.
Monitoring and evaluation
This measure will be kept under review through communication with affected taxpayer groups.
Further advice
If you have any questions about this change, please contact Karen Bishop on Telephone: 03000 512336 or email: pensions.policy@hmrc.gov.uk.