UK’s LTA Frozen for Five Years

The UK Chancellor announced on 3 March a five-year freeze to increases in the UK’s Lifetime Allowance (LTA) limit, raising the risk of more retirement savers being caught by this tax.

The UK’s LTA is the amount of savings you can take from your UK pension without facing a UK tax charge (which applies irrespective of the fact that you are no longer a UK resident and/or taxpayer). It was introduced in 2006 and was initially set at £1.5M, then rising to a peak of £1.8M in 2010. Since then, it has been progressively lowered by the UK government until it was announced three years ago that the LTA would again rise each year by inflation. The LTA is currently £1,073,100 and it had been expected to rise by inflation of £5,800 in the 2021/22 UK tax year. However, the LTA will now be frozen at £1,073,100 until April 2026.

Whilst having over a £1MM in retirement savings may sound like a large sum to many people, as we continue to live longer, our savings needs to last longer too. We are seeing more and more people saving in excess of this into their UK pensions. The LTA applies to defined contribution and defined benefit pensions. As an example, for defined benefit pensions, the amount tested against the LTA is a person’s annual pension at retirement multiplied by 20. This would mean an annual pension in excess of £53,655 would attract an LTA tax. This could affect many civil servants in the UK, like doctors.

The Treasury has estimated that this LTA freeze will raise £990m by 2025/26. This is a result of people not saving as much into their pensions (so not claiming UK tax relief) and others having to pay an LTA tax. Commentators have been critical of the freeze as it penalizes prudent saving and investment for retirement.

The LTA is not a limit on the amount you can save in your UK pension, but if you are approaching the LTA you should consider what the UK tax treatment could be. We would also recommend that you seek advice from a financial adviser on how best to manage the LTA in the context of your retirement objectives.