Pensions will be the key beneficiaries of today’s five-year high inflation figures as the lifetime allowance, public sector pensions and the state pension all get more generous.
The pensions lifetime allowance (LTA) will increase by £30,000 from April 2018 to £1.03m as a result.
This is because the government announced at Budget 2015 that it would reduce the lifetime allowance for pension savings from £1.25m to £1m from April 2016, but that from 2018-2019, the allowance will be increased by CPI inflation.
The LTA represents the maximum amount of money a saver can save in their pension pot before incurring an additional tax charge.
According to Nathan Long, senior pension analyst at Hargreaves Lansdown, even a small increase “is welcome news for pension investors with larger pots. However we continue to see this limit as a penalty for those who have invested wisely.”
Ourselves and most pension experts believe as there is an annual contribution limit of £40,000 (or lower for some higher earners), the LTA serves little purpose and should be abolished.
Today’s figures will also have an impact on the state pension, with next year’s state pension increase likely to be £164.33 a week (£8,545.50 a year), as it is based on September CPI figures (among other things).
Public sector pensions for next year are also linked to the September inflation rate. Since 2015, these schemes have moved to using ‘career average earnings’ as opposed to ‘final salary’ pensions. This basically means that each year members ‘bank’ their accrued pension and this is uprated in-line with the previous September’s inflation.
According to Hargreaves Lansdown, some pensions increase this cumulative accrued benefit by more than inflation, such as the Teachers’ Pension (CPI + 1.6 per cent), NHS Pension (CPI + 1.5 per cent), and the Police Pension (CPI + 1.25 per cent).
So, with inflation of 3 per cent, the increase for pensions being accrued will be 4.6 per cent on the Teachers’ Pension, 4.5 per cent for those in the NHS and 4.25 per cent for the Police Pension Scheme.
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