The lifetime allowance was only due to increase by 0.5 per cent this tax year due to the low inflation figures in September, so the freeze announced in the Budget will only have a small impact this year.
We had estimated that the LTA would increase by only £5,800. The increase could have led to an extra pension commencement lump sum of up to £1,450 for someone utilising 100 per cent of the LTA in one go.
For many who are partially crystallised, the difference would be significantly less. The same level of benefit would be lost for someone exceeding their LTA; £5,800 less would have been subject to the LTA charge, worth £1,450 as a tax saving.
The bigger issue is the removal of future increases. The LTA has been frozen at £1,073,100 until April 2026.
Estimates based on CPI inflation returning to a more reasonable 2.5 per cent could have seen the LTA at just under £1.2m in 2025-26. This effectively caps the tax-free cash at today’s level and could subject more people to the lifetime allowance charge in the long run.
This is disappointing to see. The LTA has been changed so many times since its introduction and changing the goal posts means that planning is made even more complicated.
However, it should be remembered that the LTA is an allowance and the charge is designed to recoup tax relief given, and not to have an overall negative impact on savings.
The tests against the LTA can be very complex when multiple schemes are involved, especially where you have defined benefit and defined contribution schemes crystallising at the same time.
It not only impacts lifetime benefits but for those with uncrystallised funds, it will also have an impact upon death, with beneficiaries paying any excess charges from the funds left to them.
Other announcements with regards to pensions are about making it easier to use pension funds in order to invest in innovative or high growth companies. Currently there are seen to be disincentives for pension funds to invest in these sorts of companies, and as a result, this is restricting access to funding.
We still await publication of further consultations on March 23 and as yet we do not know what these will include.
Claire Trott is head of pensions strategy at St. James's Place
