Reports have suggested that a freezing of the lifetime allowance (LTA) at £1,073,100 for the rest of this Parliament will be announced by Chancellor, Rishi Sunak, in the upcoming Budget on 3 March .

LTA had been expected to rise by £5,800 in 2021/22, in line with 0.5 per cent Consumer Prices Index inflation, but a report from The Times stated that the decision to leave it in stasis as part of the Chancellor’s Budget next week is expected to raise £250m a year by 2024.

The move could push many thousands of retirement savers into paying 25 per cent tax on additional income for their pension pots, while keeping the LTA frozen for years to come would stop it from rising in line with any inflation increase that might accompany economic recovery.

Aegon pensions director, Steven Cameron, commented: “This would mean more individuals, many simply seeking to do the right thing for their retirement, exceeding it, and facing a tax penalty, because of achieving good investment growth in their defined contribution pension. The other group likely to be hit are those building up generous defined benefit pensions.”

Sunak is potentially attempting to bolster the government’s coffers after they have been squeezed by the impact of the pandemic, with AJ Bell senior analyst, Tom Selby, stating that this meant it was “inevitable” that all areas of government spending would “come under the Chancellor’s microscope”.

Broadstone technical director, David Brooks, said the freezing of the LTA was a "relatively pointless tinker, especially when considered in the context of the massive cost of furlough".

He continued: "The current low level of inflation also limits the impact this time. We should also be clear that the impact is on those currently saving.

“Not those already retired. Given this government frequently road tests ideas in the press I would not be surprised if this gets shelved or is paving the way for a bigger change. This sort of fiddling with the periphery of pensions rules does nothing for the long-term nature of pension saving nor helps the Chancellor balance the books. You have to wonder what the point is.”

Selby stated: “The decision to scrap LTA inflation protection for the rest of this Parliament is likely less about the modest 0.5 per cent rise in the lifetime allowance due to kick in from April this year and more about rises in subsequent years.

“If we see a vaccine-inspired spending boom in the UK this summer, for example, inflation could be pushed northwards - and so too would the lifetime allowance under current legislation. By freezing the lifetime allowance as inflation spikes, the Chancellor will stealthily drag thousands more people into his tax net.”

This kind of concern has been seen before with state pensions, where industry figures expressed worries that the triple lock on the benefit could lead to double-digit growth and a gaping hole in government finances due to the potential for an earnings boom after economic recovery from the pandemic.

Cameron stated that earlier pensions-related rumours about the upcoming Budget had told of “a much more radical change to grant people a flat rate tax relief of 25 per cent on their pension contributions”, which he noted “would have been good news for basic rate taxpayers but a significant cut in incentives for higher and additional rate taxpayers”.

He explained: “A move to flat rate relief would reduce if not remove the need for a lifetime allowance as incentives on payments in for higher earners would be far less. So, a lifetime allowance freeze would seem to reduce the likelihood the chancellor is about to move to flat rate.”

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