Budget: What does frozen IHT, LTA and CGT mean for savers?

The Chancellor left IHT thresholds, the Lifetime Allowance and Capital Gains Tax untouched in yesterday's Budget, and is expected to raise £2.04 billion from freezing or maintaining the thresholds by 2025/26.

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Rozi Jones
28th October 2021
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"The Chancellor highlighted that higher inflation is with us in the near term at the very least which will further erode the real value of the lifetime allowance."

The Government forecasts to raise an extra £985m from freezing IHT bands, £990m from freezing the Pension Lifetime Allowance, and £65 million by maintaining the annual exemption on CGT.

Aside from raising over £2 billion in stealth taxes, we asked industry experts what the decision means for savers and retirees.

Paul Barham, partner at Mazars, said: “Pensions were under the spotlight in the pre-Budget rumours. But it seems that the Chancellor has steered clear and left taxes on these, such as the annual and lifetime allowances, well alone. However, amid concern around rising inflation, the freeze in the Lifetime Allowance means millions more people could be caught out. A tax that was originally intended to impact a small proportion of the UK’s top earners will, in the coming years, leave more people exposed to sticky tax situations.

“And while it may not be the focus right now, it has the potential to change the very make-up of the UK workforce. For many, it will make deciding exactly the right time to retire a fine balancing act - choosing whether to either retire early or continue contributing and potentially face a higher tax bill. A shift away from pensions as the primary source of income in retirement has already begun, with people considering other means of saving and investing to provide a sum of money they can draw from in later life. Something the Government should be keen to avoid.”

Andrew Megson, executive chairman of My Pension Expert, added: “Given the volatility experienced by savers throughout 2021, the Government was right not to introduce any major pension policy changes. So too was promising offering greater protections for workplace pension savers from higher scheme charges. However, the pension system is far from fixed – nearly 2.1 million UK pensioners are currently living in pension poverty. Mr Sunak can’t afford to be complacent.

“Now, the Government must ensure savers have the necessary tools to effectively plan for retirement. Given the amount of disruption savers have faced in 2021 – the temporary pausing of the state pension triple lock, and uncertainty surrounding pension age increases, to name a few examples – guidance simply won’t do. People need access to independent financial advice.

“I want to see the Government reaching out to regulatory and advisory bodies to achieve this. Without a cross sector effort, we could see future generations of retirees facing disastrous financial consequences.”

Steven Cameron, Pensions Director at Aegon, commented: “At the last Budget the Chancellor introduced a painful freeze to the pensions lifetime allowance. The allowance has been dramatically cut over the last decade and is now frozen at £1,073,100 till 2026. While this may look high, it is leading to a growing numbers of savers, and not just higher earners, risking breaching the limit. The Chancellor highlighted that higher inflation is with us in the near term at the very least which will further erode the real value of the lifetime allowance. It’s imperative that this freeze doesn’t continue indefinitely.

“Our analysis highlights how with good investment returns, many people who are likely to consider themselves a long way from the cap at present could be caught out. For example, a 6% investment return over the next 9 years would take someone with £686,000 today over the limit, even if they do not contribute a penny more to their savings. Similarly, at a more modest growth rate of 4% someone with £882,000 will breach the limit within 5 years. The lifetime allowance is effectively punishing those who have done the right thing and saved regularly over the course of their lives. With inflation on the rise, that punishment is greater and more wide reaching, making it an area that requires reform in the years ahead.”

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