Britain's finance minister, Rishi Sunak, has frozen the lifetime allowance (LTA) for pension contributions at just over £1m for the remainder of this Parliament, and will be keeping IHT at the current level for a further five years.
The Chancellor said the LTA would remain at its current level of £1,073,100 for 2020/21 rather than increasing in line with inflation. It had been expected to rise by £5,800 in 2021/22, in line with 0.5% Consumer Prices Index.
The IHT threshold will also be held at current levels until April 2026.
In a widely predicted move - it was leaked last week - the freeze is estimated to net the Treasury an additional £250m in tax.
If the lifetime allowance rose alongside inflation it would increase by a further £88,900 by the end of the current parliament.
It is thought medium to high earners in the public sector - who are building up significant defined benefit (DB) pensions - would be badly affected by the change.
The LTA is £1,073,100 for defined contribution pensions. The LTA in DB schemes is an annual pension amount of one twentieth of the ‘cash' limit, or £53,655 a year.
The lifetime allowance peaked at £1.8m in 2011/12 before being reduced back down to £1m by 2016/17. It has then risen by the consumer price index each year since then and is currently set to increase to £1,078,900 for the 2021/22 tax year.
To replicate the DB pension with an annuity would cost more than £2m, according to LV= retirement director David Stevens. He pointed out the "LTA is actually far more generous for DB benefits".
Zurich head of life product and inforce Gareth Jenkins said: "There's no easy way to fix the nation's finances but a raid on pensions is particularly punishing, especially alongside the existing limits on annual allowances.
"Freezing the lifetime allowance is nothing less than a tax on growth. This will hit people on middle incomes who save hard or invest wisely, including NHS doctors and headteachers. With the threshold frozen, more people will be dragged into the tax net, as inflation and wages continue to rise over time."
He added: "Ultimately, this could drive disillusioned savers away from pensions. Savers making long-term decisions for retirement need certainty, not continued tinkering and piecemeal changes."
Standard Life technical manager Dave Downie said the freeze would only affect a "relatively modest number of taxpayers" this year but that number would grow over time.
"Each year the allowance fails to keep pace with inflation it is a step closer to LTA charges affecting ordinary pension savers. While a pension pot of £1m may feel like a significant sum of money it has to last throughout retirement.
"For someone seeking to keep their drawdown income withdrawals at a sustainable level to last maybe 30 years and take into account inflation, a withdrawal of around 3% provides an annual income of around £32,200 before tax.
"So this isn't something that will only affect the highest of earners and a prolonged period of no inflationary increases will quickly reduce that income in real terms and could further affect confidence in pensions. But it is important to remember that the LTA isn't a ceiling on what can be saved into pensions.
"There are many good reasons for those potentially impacted to continue saving into their pension especially if stopping funding means losing out contributions from their employer."
And Andrew Tully, technical director at Canada Life, was also sceptical: "This measure simply sends the wrong signal to savers trying to do the right thing. It also penalises good investment performance. We already have annual limits on the amount you can save via a pension wrapper and there is a significant disparity between how defined contribution savers and those with defined benefit income are treated for lifetime allowance purposes."
Tully added: "The lifetime allowance is an arbitrary tax which penalises DC savers. The last 10 years has seen the lifetime allowance fall from £1.8m to £1m; stay frozen at £1m; gradually increase by inflation; and now is frozen again. These continuous changes to pensions policy exacerbate the uncertainty many people feel around pension saving. Instead of constant tweaks we need stability to give people confidence to save for the long-term."
Tim Crook, head of tax at Discreet Law, commented on the IHT level: "At first glance the freezing of the inheritance tax thresholds, the pensions lifetime allowance, and the annual exempt amount for capital gains tax may seem like a good thing. However if the various thresholds and allowances do not keep pace with inflation, they are effectively tax rises that will affect most of us and particularly higher earners."
"Incredibly, the current nil rate band for inheritance tax (of £325,000) came into force from 6 April 2009 and hasn't been increased since despite inflation and substantial increases in house prices since then (albeit that the main residence nil rate band was introduced from 6 April 2017 which softens the blow for some)."
