Chancellor urged to consider ‘immediate’ increase to lifetime allowance

An “immediate” increase to the lifetime allowance has been called for by Aegon following a recent announcement by the Chancellor of the Exchequer.

Following the Chancellor setting out 4 E’s for economic growth, Aegon pensions director, Steve Cameron, highlighted three aspects of pension tax rules that currently “discourage work” and could, therefore, need reform.

One of the areas identified by Cameron was the lifetime allowance which, after being “severely” cut back a few years ago, now sits at £1.073m and has been frozen at that level until 2026.

However, Cameron warned that due to the recent increases in inflation, the lifetime allowance is worth less year-on-year than it would be otherwise.

To rectify this issue, Aegon stated that it would like the Chancellor to make an “immediate” increase in the limit to £1.5m and reinstate the inflation linked increases thereafter.

Another area that was identified as being in need of change was the annual allowance, as Cameron explained that some individuals in defined benefit (DB) pensions may find the value of an extra year of pension benefit is valued at above this, particularly if they receive a significant pay increase for example on a promotion.

The last area that was identified as in need of change by Aegon was the money purchase annual allowance , as Cameron cautioned that many individuals over 55 who had taken income “flexibly” from their money purchase pension may not have realised that they were subject to the allowance and may have only done so because they stopped work or to tide them over during the pandemic.

This would mean that the most they and their employer can pay into a pension in future, including if they return to work, is just £4,000 a year and means that many are unable to take advantage of full pension entitlements and won’t be able to rebuild their pension pot for a later retirement.

To address these issues, Cameron called for an increase to £10,000 as it would make it “far less” likely that individuals would be affected here.

Speaking on the changes, Cameron commented: “If the Chancellor truly wants to send a message to over 55s who have left the workforce that ‘your country needs you’, then pensions tax rules need to be updated to reflect today’s world of work.

“While this might mean a little less tax is collected, it could generate much more if encouraging more employment participation.”

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