The lifetime allowance is set to rise to £1,078,900 from April next year in line with the 0.5% inflation figure.
The Consumer Prices Index (CPI) figure, published today (21 October), is used to calculate the allowance on an annual basis. In April next year the allowance will increase in-line with inflation from the current level of £1.073m.
The rise for 2020/21 means most savers will be entitled to an extra £1,450 tax-free cash.
Today's CPI inflation figure also means that in line with the ‘triple-lock' policy, the state pension is expected to rise by 2.5% next year, which is five times the rate of inflation.
Under current rules, the state pension is increased by the ‘triple lock' which is either the highest of earnings growth, price inflation, or a 2.5% minimum guarantee.
AJ Bell senior analyst Tom Selby said: "While a lifetime allowance of over £1m might sound like a king's ransom, for a healthy 65-year-old it would buy a single-life annuity paying less than £28,000 (assuming full tax-free cash entitlement is taken) - a decent income but below the average salary in the UK.
"Although clearly dealing with unnecessary complexity in the pension tax system is not a priority at the moment, at some point we hope the government will address these issues.
"We know complexity combined with constant moving of the goalposts puts people off saving for their future, something which as a country we need to be encouraging more people to do."
Lane Clark & Peacock partner Steve Webb said: "Despite low inflation and falling earnings, the triple lock policy is likely to lead to the main state pension rate rising by 2.5% next April, an increase of five times the rate of inflation.
"Given that the UK state pension is still low by international standards, the chancellor may feel justified in going ahead with such an increase. He will however face a bigger challenge next year if earnings bounce back and if the triple lock policy would imply an increase of 5% or more. At that point we may see a more ‘flexible' interpretation of the government's manifesto commitment."
Aegon pensions director Steven Cameron added: "Since April 2019, the state pension has received an above inflation increase with the 3.9% increase in April 2020, 2.2% higher than price inflation and next year's exceeding inflation by a further 2%. While this will be welcomed news in a difficult climate for pensioners, concerns remain over both the affordability and intergenerational fairness of maintaining the triple lock.
"The state pension is not funded in advance but on a ‘pay as you go' basis from today's workers' national insurance contributions. The chancellor will no doubt be facing difficult decisions over whether he can afford to retain the triple lock as he supports the economy through wave two of the pandemic and looks ahead to getting the nation's finances back on track."
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