When chancellor Jeremy Hunt announced the abolition of the lifetime allowance (LTA) in this year’s Spring Budget, Labour was quick to condemn the move and pledge to bring it back if it wins the next general election. But a research paper by pensions consultancy LCP, which counts former pensions minister Steve Webb among its partners, argues that doing this would be a massive undertaking.
The LTA capped the total amount savers could hold in their pensions without incurring a tax charge at £1,073,100, punishing investment growth as well as pension contributions. Hunt abolished the LTA to try to encourage people, particularly NHS doctors, to keep working until later in life by taking away a financial disincentive to doing so.
If Labour reinstated the LTA, those who have started to save again into pensions and breached the LTA could be subject to a charge. However, this would be a retrospective form of taxation so it is likely that a set of protections would be put in place for savers in this situation, as happened when the LTA was introduced in 2006.
If a change of government is imminent, savers might start changing behaviours based on the expectation that the LTA will be reinstated. For example, those with big defined-benefit pensions, including NHS doctors, could retire early. Although Labour has suggested that it will put in place separate rules for doctors, it needs to be more specific about them ahead of the election or risk doctors picking the more certain option of retiring. On top of this, people on higher incomes with unused annual allowances from previous years could pile money into their pots and then crystallise them before the LTA is reintroduced to avoid the charge.
This would, at the very least, reduce how much money LTA charges raise for the government, as well as making the system even more complex. “Whilst reinstating the LTA is no doubt attractive from the perspective of political messaging, the practicalities and risks associated with doing so would appear to be daunting,” argues LCP.
Meanwhile, the abolition of the LTA has yet to become law. Hunt only waived the LTA charges for the current tax year, to allow for the extra time needed to legislate on the subject. The LTA is due to be abolished from April 2024, but it is unclear whether the government will make the deadline.
Investment platform AJ Bell called for this year’s temporary arrangements to be extended to April 2025, arguing that the legislation on the abolition of the LTA is still incomplete and there is not enough time to implement it. An HM Revenue & Customs policy proposal suggests that as part of the LTA abolition, inherited pensions could be subject to income tax even if the benefactor dies before age 75. At present, if a saver dies before 75, the beneficiaries of their pension pot can draw income from it free of income tax and inheritance tax. This would be a significant change and is one of the aspects of the legislation that needs clarifying.
By April 2025, chances are we’ll have a new government, quite possibly a Labour one. It would be complicated and frustrating for pensioners, as well as slightly ironic, if the allowance were to be reinstated before it was even abolished for real.
