Labour drops LTA reintroduction plans

According to a recent report in the Financial Times, The Labour Party will be dropping their previous pledge to reinstate the lifetime allowance on pensions after Chancellor Jeremy Hunt abolished the policy earlier this year.

Labour is due to publish its manifesto on June 13, and it is understood that the reintroduction of the lifetime allowance will not appear in their manifesto as anticipated previously. This u-turn will cost an estimated £800m but is likely to be welcomed by many savers, particularly higher earners with generous defined-benefit schemes.

What was the ‘lifetime allowance’?  

Essentially, the lifetime allowance was the total amount of capital you could accumulate in all your pension savings tax efficiently. When it was abolished by chancellor Jeremy Hunt earlier this year, the lifetime allowance stood at £1,073,100. This included any employer contributions or investment returns that your pension had amassed over the course of its life.  

If your total pension size exceeded this limit then you would be taxed on the excess amount. The amount you will be taxed depended on how you accessed the funds. If the excess was taken as a lump sum then it would have be taxed at 55% but if you took the excess as an income then you would have only been taxed at 25%. This 25% tax charge was paid in addition to the tax you paid on the income you received. 

Reintroduction considerations  

Despite Labour’s pledge to reinstate the lifetime allowance, the legislation to reintroduce this has proven to be more complex than anticipated.  

Last week, the Institute for Fiscal Studies said reintroducing a reformed LTA would be "sensible" and it laid out several options for how this could happen.  

The first would be to simply reinstate it at its previous level, but this would raise several questions, it stated. One option set out by the IFS was to reinstate the lifetime allowance at a higher value alongside a reduction in the amount of pension from which 25 per cent can be taken tax free. Another option could be to reintroduce the lifetime allowance as a cap on contributions to DC pensions and accrued benefits in DB pensions, rather than on the pensions’ estimated value.  

Carl Emmerson, deputy director of the IFS and co-author of the piece, said given the current way in which pensions are taxed there is a case for reintroducing a lifetime allowance. This is mainly because many other aspects of the system are overly generous to high earners who get sizeable employer contributions and accumulate big pension pots, he said.

He added: “Rather than a simple knee jerk return to the system of two years ago, a new Labour chancellor would be well advised to implement a comprehensive and lasting reform which could rationalise, simplify and make fairer the current system of pension taxation whilst also raising revenue in the medium term."

“The danger is that a reintroduced lifetime allowance ends up being just another bump in the pensions tax road, and another missed opportunity to rationalise the system with a coherent package of measures.”

Although the Lifetime Allowance has been abolished, it has been replaced with two new allowances, so some complexity remains if you planning to take benefits from your pension funds. At The Private Office we can offer advice and guidance about how to best navigate this often difficult area, particularly if you have already taken benefits from some of your pension funds before the new allowances were introduced. If you want to find out more, why not give us a call on 0333 323 9065 or book a free non-committal initial consultation with one of our chartered advisers. 

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.