Lifetime Allowance Flawed For Defined Contribution Pensions
Published / Last Updated on 08/03/2021
The Chancellor’s Budget last week confirmed that many benefits, personal allowance and tax band thresholds will increase by inflation in April 2021 but then be frozen for the next 5 years until April 2026.
The Lifetime Allowance (LTA) (the maximum rights you can accrue in pension funds throughout your lifetime) was not increased and will remain fixed for 6 years i.e. this tax year 2020/21 through to April 2026. The LTA is £1,073,100.
Maximum Defined Contribution Pension
This means for a defined contribution, investment linked workplace pensions, group personal pension plans, personal pensions, stakeholder pensions, freestanding AVCs, SIPPs, SSAS and executive pension plans, all commonly known as defined contribution schemes, the maximum you can build up in pension funds without an exceeding the LTA and facing tax penalties is £1,073,100.
For a healthy 65 year old, £1,073,100 would buy an annuity pension (with 50% spouses benefits and with income increasing with inflation) of just over £29,000 pa.
Maximum Defined Benefit Pension
Defined benefit pensions such as Final Salary and Career Average Salary schemes work on the basis of an income multiple of 20 X your pension per annum to calculated whether you are within or exceed the LTA.
With the LTA at £1,073,100, if you divide this by 20 = maximum pension £53,655pa.
Why is it that a person doing exactly the same job for the same pay but one working for Company A with a defined contribution scheme can build up a maximum pension fund of £1,073,100 to give an inflation linked annuity pension of £29,000pa but the other person working for Company B with a defined benefit pension can build up a pension up to £53,655pa? This stinks!
