LONDON, 4 March 2021 – Aon plc (NYSE: AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions, has said that the announcement in the UK Chancellor’s Budget that the Lifetime Allowance (LTA) will be frozen at the level of £1,073,100 until April 2026, will have a disproportionate effect on savers in defined contribution (DC) pension schemes. The measure is expected to generate additional tax revenues of approximately £1 billion over the five tax years to 2025/26.
Matthew Arends, partner and head of UK Retirement Policy at Aon, said:
“Investment growth on DC pension pots counts against the LTA, so the burden of this announcement will fall disproportionately on savers in DC schemes. A DC saver with a pension pot currently equal to the LTA, will see 55 pence of every £1 of investment return going to the Treasury in an LTA tax charge. Faced with this prospect, DC scheme members may well be disincentivised to save and to seek investment growth.
“In addition to this, DC savers are already treated less generously in measuring their savings against the LTA when compared with savers in defined benefit (DB) schemes. DB savers see their retirement pensions multiplied by a factor of 20 in comparison with the LTA, whereas an equivalent annuity rate for DC savers would typically be between 30 and 40.”
Matthew Arends continued:
“The result is that the LTA bites for much smaller DC pensions than for DB ones. While the LTA is reached with a DB pension of approximately £54,000 per annum, it’s just £25,000 to £35,000 per annum for a DC saver, depending on their circumstances. That DC pension could be built up by contributing £10,000 each year - just half the annual ISA allowance - for 40 years, into a DC scheme that earns 5% per annum investment growth.
“This increasing distinction in the tax treatment between DC and DB savers is particularly relevant if one bears in mind that private sector workers are typically saving in DC schemes, whereas DB schemes are more likely to be where public sector workers are saving for their retirement.”
Notes to editors
About Aon
Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.
Follow Aon on Twitter and LinkedIn
Stay up to date by visiting the Aon Newsroom and hear from Aon’s expert advisers in The One Brief.
Sign up for News Alerts here
Media Contacts
Colin Mayes
Aon
Phone: +44 (0)7801 748138
Email: [email protected]
OR
James Hartwell
Kekst CNC
Phone: +44 (0)7870 487532
Email: [email protected]