Pension saving is key to many people, as are the freedoms associated with reaching the age of 55, and as a result, being able to withdraw money without meeting charges is important. However, savers will have to worry less about this, as the Lifetime Allowance is now set to increase, with changes kicking in from the start of the next tax year. The Lifetime Allowance is the overall limit on the amount of pension benefit which can be withdrawn from pension schemes without incurring an extra tax charge.
At present, the Lifetime Allowance currently stands at £1,073,100, however the figure is set to rise after today’s announcement.
In the new tax year, the Lifetime Allowance will therefore stand at £1,078,900 – a total increase of £5,800.
The Lifetime Allowance was first introduced in 2006, but has undergone some level of change since, being reduced gradually since 2011.
The change relates to the September Consumer Prices Index figures published today, and will influence many pension savers.
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Tom Selby, senior analyst at AJ Bell, commented on the news.
He said: “The pensions lifetime allowance will rise a bit next year, although with inflation subdued in September, the increase will be just 0.5 percent.
“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 £1million 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.”
Mr Selby, however, expressed concern the Lifetime Allowance had undergone repeated cuts since the 2011/2012 tax year.
He stated that this often punished people who enjoy strong investment growth, as well as causing issues for public sector workers who had served for long periods of time.
He called upon the government to address the pension tax system complexity which has frequently arisen in recent years.
The announcement of todays CPI inflation figure has also had an impact on the state pension, provided by the government to hard-working Britons who have put forward years of National Insurance contributions.
In line with the Triple Lock Mechanism, first introduced by the then-coalition government, the state pension will rise by 2.5 percent next year.
This is a staggering five times the rate of inflation – meaning pensioners are set to be protected in the future.
Rules outlined under the Triple Lock Mechanism state the sum must increase each year by the highest of one of three components: average earnings growth, price inflation or 2.5 percent.
The Lifetime Allowance applies to the total of all pensions a person has put aside, however, excludes the state pension sum they are entitled to.
However, Britons are urged to pay attention to the potential charges which could be incurred by failing to bear the allowance in mind.
The Money Advice Service states any amount over the allowance taken as a lump sum is taxed at 55 percent.
And any amount taken as a regular retirement income over the allowance attracts a charge of 25 percent.