"Each year the allowance doesn’t keep pace with inflation is a step closer to LTA charges affecting ordinary pension savers."
Speaking in today's Budget, Sunak said: "I will also maintain, at their current levels, until April 2026: The inheritance tax thresholds, the pensions lifetime allowance, the annual exempt amount in capital gains tax and, for two years from April 2022, the VAT registration threshold."
Sunak also announced that income tax, national insurance, and VAT rates will be frozen until next year.
The chancellor said the income tax threshold will increase next year to £12,570 and the higher rate threshold will rise to £50,270, but rates will then be kept at that level until 2026.
Sunak said: "Our response to coronavirus has been fair, with the poorest households benefiting the most from our interventions.
"And our approach to fixing the public finances will be fair too, asking more of those people and businesses who can afford to pay and protecting those who cannot.
"So this government is not going to raise the rates of income tax, national insurance, or VAT.
"Nobody’s take home pay will be less than it is now, as a result of this policy.
"But I want to be clear with all Members that this policy does remove the incremental benefit created had thresholds continued to increase with inflation.
"We are not hiding it, I am here, explaining it to the House and it is in the Budget document in black and white. It is a tax policy that is progressive and fair."
The current pension Lifetime Allowance will therefore remain at £1,073,100. Research from Aegon shows that a fund of this size would typically buy someone aged 65 an income for life of around £26,100 a year, increasing in line with inflation before tax. For someone paying basic rate income tax, it equates to £1,740 a month after tax.
Steve Webb, partner at LCP and former pensions minister, commented: “Although pension wealth of more than £1 million will seem a huge amount to most people, probably more than a million people of working age can expect to breach that threshold based on current policies. What people need in pension planning is certainty. But with the LTA we have seen the opposite. First it was slashed, from £1.8m to £1m, then frozen, then linked to inflation and now frozen again. It is almost as if the government doesn’t have a long-term plan but makes it up as they go along.”
John Tait, retirement advice specialist at Standard Life, said: “A freeze to the LTA this year may only affect a relatively modest number of taxpayers. But each year the allowance doesn’t keep pace with inflation is a step closer to LTA charges affecting ordinary pension savers. While a pension pot of £1million may feel like a significant sum of money it has to last throughout retirement, and more and more are saving in excess of this into their pension. For example, a £1million pot will give you an annual income of around £32,000 before tax assuming withdrawals at a level of 3%. So in reality, this isn’t something that could only affect the highest of earners.
“The first thing is don’t panic, good planning will help minimize the impact of the LTA freeze on your retirement finances. An adviser will be able to help you consider what it might mean for you, thinking about the LTA alongside other important considerations, like the income tax you may pay on pension withdrawals, or the inheritance tax your estate may have to pay if you take funds from your pension and don’t spend them.”
Parminder Gill at Wesleyan Group added: “We oppose any changes that discourage savers from putting money towards their retirement.
“Freezing the lifetime annual allowance creates a less-favourable tax-regime for pension savers and these changes need to be carefully considered by anyone saving for retirement."
Industry experts had expected a freeze in the Lifetime Allowance but had expected reforms to CGT following a recent review.
In July 2020, Sunak asked the Office of Tax Simplification to review CGT rules, specifically asking for a review of its use in "the acquisition and disposal of property" and "the practical operation of principal private residence relief".
The OTS then published a report in November 2020 which found that "many features of Capital Gains Tax which can distort behaviour, including its boundary with Income Tax and interconnections with Inheritance Tax".
The report said that "more closely aligning Capital Gains Tax rates with Income Tax rates has the potential to raise a substantial amount of tax for the Exchequer".
