A long-standing annual limit on pension contributions for individuals without employment income is preventing many from building adequate retirement savings, according to an analysis by former Pensions Minister Steve Webb.

The standard allowance for contributing to a pension with tax relief is typically £60,000 per year or 100% of earnings, whichever is lower. However, a separate provision allows anyone, regardless of earnings, to contribute up to £3,600 gross annually. This breaks down to £2,880 paid by the individual, with HM Revenue and Customs (HMRC) adding £720 in basic-rate tax relief. Contributions above this limit may be permitted by some pension providers, but any tax relief on amounts exceeding £3,600 is reclaimed by HMRC.

This £3,600 limit has been frozen since at least April 2001, when stakeholder pensions were introduced, despite a consultation at the time suggesting the figure was set high and would be periodically reviewed. If this limit had been increased in line with inflation, it would now be approximately £6,500.

Several groups could benefit from an increased limit:

  • Early Retirees: Individuals who retire before the traditional age but have other savings or unearned income may wish to contribute more to their pensions. Those who leave paid employment before workplace pension schemes are accessible may be particularly vulnerable to inadequate retirement savings.

  • Parents and Grandparents: Adults can contribute to a pension for a child, up to the £3,600 limit. Regular contributions can provide a significant head start for a child's retirement savings.

  • Non-Working Partners: Individuals with periods of low or no earnings, such as stay-at-home parents, could have a partner contribute on their behalf. Raising the limit could potentially help reduce the gender pension gap, as women are more likely to have their pension savings affected by career breaks for childcare.

Potential adjustments to the limit could involve restoring its value to when it was introduced and subsequently indexing it to inflation, or aligning it with other pension tax relief allowances, such as the £10,000 annual allowance for high earners or the money purchase annual allowance for those drawing taxable cash from a pension.