The pensions lifetime allowance (LTA) limit is to increase to £1.078 million from April 2021/2022.
This represents an increase of £5,800 from the current £1.073 million limit that was set in the 2020/2021 tax year, meaning that pension members can save more money into their funds without receiving a tax charge.
The LTA is an amount of pension benefit that can be saved by an individual without triggering an extra tax charge. This new increase in saving limits is due to a 0.5% rise in inflation in September 2020, an increase from the 0.2% rise in August 2020, announced on 21 October by the Office for National Statistics (ONS).
Paul Avis, strategic proposition director, group insurance at Canada Life, said: “Today’s release from ONS and the subsequent increase of the lifetime allowance should serve as a reminder for employers of potential unexpected repercussions for holders of registered group life insurance.
“Many employers and employees are unaware that benefits from this type of insurance policy are also counted under the pensions lifetime allowance. As a result, beneficiaries of death benefits can find themselves surprised with a 55% tax bill for any amount they receive over the LTA threshold.
“While it is true that the LTA level increases every year, this does not necessarily mean fewer people are affected. Annual salaries also increase, often beyond inflation, alongside growth in pension fund value. To avoid this problem a number of employers have been adopting Excepted Group Life Trusts instead which are not counted under the allowance.
“This unintended consequence demonstrates how critical it is that employers and pension trustees regularly review the impact of the LTA on death benefits and understand how their policy holders would be treated.”