Retirement savers are finding their plans to plough money into pensions are stifled by prices rising slower than wages.
The annual increase in the lifetime allowance for pension saving is based on cost of living inflation, which is not going up as fast as wages.
The lifetime allowance cap is £1.055 million this year – which is the limit any one can save into pensions with attracting penalties for HM Revenue & Customs.
The Consumer Price Index, the government’s official measure of inflation, was 1.7% for September.
This is the figure the lifetime allowance is set to increase by in April 2020.
£18,000 hike
The hike will see the lifetime allowance rise to £1.073 million – an £18,000 rise which amounts to a £600 increase spread over a 30 year working life.
Official data puts the growth in average wages at 3.8%, which means many savers have surplus money they would like to save into a pension but can’t if they want to avoid penalties in later life.
Although wages vary between business sectors, the average UK wage is £502 a week or £26,468 a year, according to the Office for National Statistics.
Steven Cameron, director of pension provider Aegon, said while any increase is welcome the forthcoming hike was in-line with price not earnings inflation.
“With wage growth remaining much higher than inflation, this means in earnings terms the lifetime allowance is becoming less and less generous, leaving more individuals, and not just particularly high earners, at serious risk of breaching the limit,” he said.
Call for review
“Recent figures showed that the total value of lifetime allowance charges paid by schemes in 2017/18 was £185 million, a 28.5% increase from 2016/17.
“The effect of the lifetime and the separate annual allowances has been in the spotlight recently with highly paid professionals in the NHS pension scheme refusing extra work or even retiring early to avoid big tax bills associated with their pensions.
“We urge the government to carry out a fundamental review of these allowances, as has been recommended recently by the Office of Tax Simplification.”
Another provider, Royal London backed the call for reform. The company’s pension specialist Helen Morrissey said: “The 1.7% inflation figure sees the lifetime allowance boosted but the annual allowance remains frozen at £40,000.
“This exposes the real lack of joined-up thinking when it comes to this ridiculously complex web of tax allowances and highlights the need for urgent reform.”
