Chancellor George Osborne has cut the lifetime allowance of tax-free pension savings from £1.25m to £1m. The old allowance of £1.25m was “unsustainable”, Osborne said, and the new lifetime allowance will be indexed so that it can rise with inflation from 2018. Changes to the annual allowance, however, will not be made.
Cutting the lifetime allowance will be a blow to the positive changes made in other pension reforms, said Claire Trott, head of technical support at Talbot and Muir. It goes against the promise of increased freedoms and the encouragement to save in a pension scheme.
“Not only will it penalise those in money purchase schemes more than in final salary schemes but it adds another layer of complexity to people’s retirement planning,” said Trott. “This will mean another round of protections that people will need to decide if they need to apply for and possibly the choice to stop contributing for fear of tax charges at retirement.”
This is the third time that the lifetime allowance has been since 2012, when it was reduced from £1.8 million to £1.5 million. It was lowered again in 2013 to £1.25 million.
Osborne had considered cutting the annual allowance too, which is currently at £40,000 but decided against this because it would penalize long-standing public servants and reward higher-paid graduates.