"Reintroducing the charge at its previous level might raise almost £800 million a year, but the damage to the NHS could far outweigh this increase in tax revenue."
- Graham Crossley, NHS pensions expert at Quilter
Labour has reportedly abandoned plans to reinstate the pensions lifetime allowance.
According to the Financial Times, shadow chancellor Rachel Reeves has dropped the proposals from its election manifesto as it would "add uncertainty for savers and be complex to reintroduce".
The lifetime allowance is the maximum which can be held in a pension on a tax favoured basis.
After being cut back from £1.8m to £1m back in 2012, the lifetime allowance was frozen by then Chancellor, Rishi Sunak, at £1.073 million in March 2021 and was due to remain at that level until 2026.
However, chancellor Jeremy Hunt abolished the allowance in the 2023 Budget in a move which was expected to cost the government £4bn over the next five years.
Labour then announced that it would reverse the government's decision to abolish the pensions lifetime allowance if it got into power, with Reeves saying that the decision was "the wrong priority, at the wrong time, for the wrong people".
A later study by Investec with higher rate taxpayers found that ditching the LTA has driven major changes with nearly six out of 10 (59%) taking a range of actions as a result.
Mike Ambery, retirement savings director at Standard Life, said: “The prospect of the LTA being reintroduced will have loomed large in the minds of those savers with bigger pensions approaching retirement. Many of these individuals will have been weighing up whether to continue paying in above the old limit or not while uncertainty remained.
“Prior to its abolition the LTA had become increasingly problematic as some savers felt punished for doing the right thing and saving regularly and investing well. The annual allowance already places an effective cap on the amount people can pay into a pension so many felt the LTA was unnecessary.”
Graham Crossley, NHS pensions expert at Quilter, commented: "Labour’s supposed U-turn on reinstating the LTA is sensible and shows that it has listened to the serious concerns being raised not only by its plans but also simply the lack of clarity about how a reintroduction would work.
"Following weeks of rumours including that there would be a carve out for the NHS, followed by the prospect of much higher upper threshold, Labour has clearly realised that each option would have sparked controversy. Similarly, how Labour would address the monetary cap on tax free cash could also open a can of worms. All these questions could end up being a distraction that poses a risk to Labour’s campaign. According to the IFS, reintroducing the charge at its previous level might raise almost £800 million a year, but the damage to the NHS could far outweigh this increase in tax revenue.
"If Labour did push on with its plan it risked causing an exodus of senior public sector workers to avoid suffering punitive tax charges. The lack of clarity is having an impact on retirement plans right now. Senior hospital doctors, GPs and senior managers are worried that a reintroduction might have been more punitive than the current tax regime. This uncertainty risks people making knee jerk decisions to retire now under the current set of rules. However, Labour will need to be careful to not compound these problems and ensure its manifesto says that they’re not going to reintroduce the LTA, rather than simply leaving the reintroduction of LTA out of the manifesto.
"Hopefully a clearer position will help stop senior doctors and medical professionals expediting retirement plans but whatever is announced in the manifesto will be crucial to those who might be impacted by the LTA."
Jason Hollands, managing director at Evelyn Partners, added: “Labour’s plans to reinstate the pensions Lifetime Allowance sprang from a somewhat knee-jerk reaction to Chancellor Jeremy Hunt’s surprise announcement that the LTA would be scrapped in his 2023 Budget. If reintroduction of an LTA is absent from the Labour manifesto on Thursday that will be welcome news, as the prospect of yet more tangled legislation to resurrect this punitive tax penalty on large pension pots and public sector pensions has caused considerable uncertainty over the last year for those deliberating whether or not to add to their savings.
“The LTA had perverse consequences for public sector professionals with generous Defined Benefit schemes, including fuelling early retirement by doctors and deterring medical consultants from taking on extra surgical work. Reintroducing it, other than at a very high level, would have jeopardised the need to clear NHS backlogs. For private sector employees with Defined Contribution pensions, the LTA both deterred people from building up their retirement provision and penalised those who made good investment choices – as investment growth could drive a pot over the LTA.
“We will have to wait a couple of days to see if there are any other pensions-related measures in Labour’s manifesto. One potential sting-in-the-tail could be a move to make DC pension assets part of a persons’ estate for inheritance tax assessment purposes. Other areas to watch for are changes to upfront income tax reliefs, the size of the annual allowance or the amount of tax-free cash that can be taken from private pensions.
“Above all the majority of savers, retirees and their advisers would welcome a period of certainty and stability when it comes to the taxation of pensions – and private pension saving in the UK would certainly benefit from that too.”
