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Rise in inflation means saving threshold for pension pots will rise next year

By Francis Jay

Lifetime Allowance to rise by around £20,000 ($25,800)

The total amount individuals will be allowed to save into their pension without punitive tax penalties, is likely to increase next year due to rising inflation.

The Lifetime Allowance, which is the total sum a person can save into their personal pension during their lifetime, is currently capped at £1,055,000. The cap is re-evaluated annually, based on the inflation rate in September, which is also used to assess changes in benefits and the state pension.

UK prices, as measured by the Consumer Price Index or CPI, were rising at 1.7 per cent in September 2019. Although the increase in the Lifetime Allowance has yet to be officially confirmed, the increase for the tax year 2020-21 is likely to be in the region of £20,000. This would take the total savings amount for an individual from the current cap of £1,055,000 to around £1,075,000 from April 2020.

Tom Selby, senior analyst at AJ Bell, said the government’s decision to peg the lifetime allowance to inflation in 2016 had “put a stop to years of cuts in retirement saving incentives by successive administrations”.

He said that as a result, savers will benefit from an estimated £18,000 boost in the lifetime allowance in 2020/21.

However, he added that he was concerned that plans to reform the UK pension system could make life more complicated for savers, or make pension savings less attractive.

“If we do finally get a proper review of the pension tax rules it will be important to ensure any changes making life easier for savers without denting incentives.”

“In addition, Government will need to find a way to ensure any simplification stands the test of time, which will likely require at least some level of cross-party commitment to long-term stability.”

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