The lifetime allowance (LTA) currently stands at £1,073,100 and will stay at this level until 2025/26 under existing plans, rather than increase in line with inflation. With a freeze on the limit and high inflation, more people are likely to be exceed the limit. HMRC revealed an 11 per cent increase in LTA charges in 2020/21.

There is concern amongst industry experts that failure to review the lifetime allowance limits could cause real and long-term damage to the UK pension system and undermine the incentive to save for a pension. 

Head of retirement planning at AJ Bell, Tom Selby, said, “In defined contribution (DC) schemes, the lifetime allowance risks punishing those who take investment risk and enjoy long-term growth as a result of taking that risk. This investment disincentive runs counter to this government’s clearly stated focus on boosting economic growth.

“It also caps people’s retirement saving ambitions at a relatively low level, currently standing at around 60% of the lifetime allowance that was in place in 2010/11 – and that’s before taking account of the impact of inflation and earnings growth. The lifetime allowance also makes the pension tax rules people interact with unnecessarily complicated, adding to an already confusing picture."

The lifetime allowance rules need to be made as simple as possible if people are to save more for their retirement.

“There are different ways you could do this. Increasing the lifetime allowance would clearly help, but there is an argument for scrapping it altogether – certainly in DC – and controlling pension tax costs with a single annual allowance. This would leave people freer to invest their pension in assets which match their appetite for risk, rather than being distracted by the impact a lifetime allowance tax charge might have. It would also help the government make good on its aim to simplify the tax system.”

If you feel that you may need retirement savings of more than the lifetime allowance, please contact your Dentons Wealth independent financial adviser, who can help you with other tax-efficient ways to save and invest.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.