Will Labour Bring Back the Lifetime Allowance and How?
Published / Last Updated on 01/12/2023
The next General Election in the UK must take place by January 2025. There are many who are speculating that this could be in early 2024 if the Chancellor’s recent Autumn Statement goes down well or if we start to see inflation really tumble or indeed consumer confidence picks up. We cannot see this happening and it is widely forecast (when you look at opinion polls) that it may be in the Spring of Autumn 2024 and that Labour will secure a landslide victory.
Pension Lifetime Allowance
In the recent Autumn Statement, the Chancellor confirmed that the lifetime allowance (LTA), the maximum pension funds that you can build up during your lifetime and draw an income from, will be abolished as part of the Finance Bill 2023-24, soon to become an Act and therefore law. This is because increased numbers of senior government workers civil servants, emergency services worker, military, and the NHS (mainly doctors), found themselves in a position of turning down overtime (to stop building up more pension benefits) during the recent turbulent history of the NHS or even taking retirement leaving the NHS and Civil Service short staffed.
Labour and LTA
The Labour Party has suggested that the removal of the LTA will be merely helping the wealthy and will allow the wealthy to ‘squirrel’ more into pension funds and avoid paying taxes. Labour has claimed that they will reinstate the LTA if they are elected. Some points to note:
- Labour introduced the LTA in 2006 at £1.5m.
- By 2010 it was already at £1.8m.
- The Conservatives steadily reduced the LTA from £1.8m down to £1m by 2016.
- So, it is Labour that has a history of not taxing the wealthier with nearly double the LTA that the Conservatives took it down to.
Issues to Restarting LTA
- Re-introducing the LTA at its current level of £1,073,100 will not solve and may make worse the exodus of surgeons, doctors, nurses, and senior clinicians from the NHS.
- Those that use this year with a 0% tax rate for exceeding the lifetime allowance and next year with the LTA abolished to either:
- Bump up more savings in pensions taking them over or further above the LTA.
- Crystalise i.e., trigger and draw pension benefits whilst there is 0% tax or no LTA.
- Without new protection when bringing back the LTA may mean retrospective taxes for those that have ‘triggered’ their pensions and this would be a problem that Labour would need to tackle.
- What happens to those that have triggered just part of their pension benefits when there was no LTA as there will be in tax year 2024/25?
- The part of their pension ‘tiggered’ will not have used any % of Lifetime Allowance when it does exist in 2024/25.
- Will the Labour government really reset all past % usage of LTA to zero? We think not.
Possible Action By Labour
- Anti-Forestalling Legislation: We can see a Labour government having an emergency budget and introducing legislation overnight to ensure that anyone who triggers taking pension benefits in 2024/25/26 (i.e., after the date of any emergency budget) to avoid taxes when there is no LTA, will be included in any new LTA and exceeding the limit thereby creating new excess over LTA tax charges.
- Labour has a history of much higher LTA limits anyway. To avoid the issues detailed above on restarting the LTA, we can see Labour:
- Reintroducing the LTA at a much higher level e.g., £2m to encourage more NHS and Civil Service workers to stay in their roles and happily build up pensions.
- Introduce an artificially high ‘benchmark’ LTA for tax year 2024/25 (when there is no LTA) so that many do not get caught with any retrospective taxes if they have crystallised their pensions during any 'No LTA Period'.
- Introduce an amnesty for those that triggered all pension benefits in 2024/25 and technically have exceeded any reintroduced LTA.
- Reintroducing a revised form of Primary Protection and Enhanced Protection in the same way that they did in 2006 when the LTA was introduced to protect those that have already exceeded any new/revised LTA limits.
See Primary and Enhanced Protection 2006: Pre 2006
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