The lifetime allowance has risen to £1,073,100 for the 2020-21 tax year, which is the lowest amount the government could have increased it to under current rules.
The lifetime allowance, the overall limit of tax privileged pension funds an individual can accrue during their lifetime, will increase in line with September’s inflation figures of 1.7% for 2020-21, rising to £1,073,100, from £1,055,000.
It was expected that the government would round this figure to the nearest £5,000 to make it easier when calculating tax liabilities but it instead stuck with the lowest possible increase.
After being introduced in April 2006 at £1.5m, the lifetime allowance grew to £1.8m in 2012 but was then cut to £1m. Since then it has edged up in line with inflation to the current £1.055m.
The government’s decision to peg the lifetime allowance to inflation in 2016 at least put a stop to years of cuts in retirement savings incentives by successive administrations.
As a result, savers will benefit from an £18,000 boost in the lifetime allowance in 2020/21, allowing up to £4,525 in extra tax-free cash to be generated.