Will Labour reinstate the lifetime allowance?

Lifetime allowance:  Now the election is under way, Labour ‘s Shadow Chancellor Rachel Reeves will be pressed to clarify the party’s plans

Savers with large pensions are keen to know whether Labour plans to curb how much you can save for retirement without facing a tax penality.

The Tory Government abolished the old £1.073million lifetime allowance last year, but Labour said at the time the party would bring it back if elected.

Now the election is under way, Labour will be pressed to clarify its plans and particularly what new limit it has in mind.

The lifetime allowance was much higher at £1.8million when Labour was last in office, but it was drastically reduced to £1million under Tory Chancellor George Osborne, before getting small hikes under his successors.

We gave details of the controversy over the lifetime allowance in our guide to what the election could mean for your pension.

Below, we have more on how it worked and the important lifetime allowance legacy rules people with large pensions should know about.

We also round up expert views on whether it will be reinstated, how this might be done, and what steps you might take now. 

What is the lifetime allowance

This was the £1,073,100 total limit people could have in their pension pot without facing tax penalties.

Chancellor Jeremy Hunt ditched it from April 2023. However, there were still some technical tidying up issues which only came into effect in April this year, and there are important legacy rules so it is not as simple as that.

Meanwhile, the annual allowance remains in place. This is the standard amount you can put in your pension every year and qualify for tax relief on what you saved.

It was hiked from £40,000 in April 2023 and is currently £60,000, or up to 100 per cent of your annual earnings if they are lower than this.

The annual allowance includes your own and your employer’s contributions into a pension, and the tax relief itself, though the rules are more complicated for higher earners.

One of the reasons the system was overhauled was to appease senior doctors, who were being penalised due to work practices like extra shifts and overtime in the medical profession, and in some cases were hit with large and unexpected tax charges for exceeding allowances.

If you have a large sum saved in a pension already, it is sensible to pay for financial advice about the legacy lifetime allowance rules to ensure you don’t make costly mistakes.

This is especially the case regarding tax-free lump sums, if you have ‘fixed protection’ – which allowed people to freeze their lifetime allowance at older, higher limits – and if you have already started taking your pension.

Labour’s possible plans to reinstate the lifetime allowance if it wins the election should also be borne in mind if this could affect your retirement plans.

What do money experts say: What might Labour do? 

‘With the election now looming, Labour will need to formalise its plans regarding the lifetime allowance,’ says Jon Greer, head of retirement policy at Quilter.

‘The party has so far backed itself into a number of corners after knee-jerk reactions to the Conservative’s abolition of the tax altogether.

‘Labour is likely going to want to change certain aspects of the new regime pending a wider review. The pension tax system has undergone substantial changes over the last year including the adjustment of the annual allowance from £40,000 to £60,000.’

Jason Hollands, managing director of Evelyn Partners, says: ‘It remains to be seen whether Labour’s knee-jerk pledge to reinstate the lifetime allowance the day after its scrapping was announced, makes it into their manifesto or is quietly dropped.

‘They may conclude that it would just resurrect problems with public sector workers, including medical professionals, with generous defined benefit pension schemes, and that a better way to milk tax off large pensions is to tinker with the tax-free lump sum or make pensions part of an estate for inheritance tax purposes.’

How might reintroducing the lifetime allowance work?

‘If a lifetime allowance is reintroduced, the key question will be at what level,’ says Hollands.

‘There is also no reason why a future Labour government should be wedded to reintroducing the lifetime allowance at the £1.073million level where it ended up under the Conservatives.

‘Under the last Labour government, the lifetime allowance ended up at £1.8 million, which would now be worth £2.5million adjusted for inflation since.’

Hollands notes that the lifetime allowance has been removed from the statute book now, so a future Government cannot just switch it back on the day after the election.

It would have to pass new legislation, probably a Finance Bill after a Budget, and it is unlikely a new lifetime allowance could be in place until April 2025, he adds.

‘Applying a new lifetime allowance retrospectively would be highly contentious, open to challenge, and therefore very unlikely.

‘There is also strong precedent, from the original introduction of the lifetime allowance and previous reductions in the threshold, that those impacted would able to take out protection, typically by ceasing further funding.’

Greer also reckons that if the lifetime allowance is reintroduced it will take some time.

But he cautions: ‘If that is the direction of travel, then it likely some form of anti-forestalling legislation will be introduced ahead of wider changes to prevent what it perceives as individuals taking advantage before a full change takes effect.

‘This approach would allow Labour to take the necessary time to amend the system thoughtfully, avoiding another rushed legislative change without fully understanding the complexities involved.’

Greer says how and when changes were implemented by Labour would be crucial, should it go ahead with them.

‘Labour must avoid the pitfalls experienced during the Conservative’s abolition of the lifetime allowance, which serves as a model of how not to execute large tax changes.

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She answers your questions on any tax topic – tax codes, inheritance tax, income tax, capital gains tax, and much more.

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‘The policy detail was developed on the fly, with very little time and an unclear understanding of the new regime’s impact.

‘Labour must opt for a measured and well-considered approach that ensures that any changes to the regime as it stands are made in a robust manner.’

Will there be a ‘carve-out’ for public sector workers like doctors?

‘Rumours that Labour was considering a carve-out for public sector workers have generated significant speculation, but the party went very quiet on this once it was much-maligned by the industry,’ says Greer.

‘The problem with public sector workers will persist for Labour if they want to reintroduce the lifetime allowance unless it’s re-introduced at a higher level for certain sectors.

‘A carve-out seems to be unpopular given that it creates an “us and them” situation in the tax system where public sector workers have more beneficial tax rights than the private sector.’

But Greer adds that the design of the pension tax system appears to be – and is likely to continue to be – primarily driven by its impact on some public sector workers. 

What should people with large pensions do?

The lifetime allowance no longer exists in law, retrospective tax changes are extremely unlikely, and in the past people have been able to apply for ‘fixed protection’ at different levels, points out Hollands.

This means there is potentially a limited window of opportunity for people who might have been deterred by the lifetime allowance to recommence pension saving, he says.

‘Making use of this window should therefore be a high priority for those wishing to bolster their retirement fund.’

Should the lifetime allowance be brought back?

‘This would be a retrograde step, adding unwelcome complexity to an already complex system,’ says Tom Selby, director of public policy at AJ Bell.

‘It would also run directly counter to wider efforts to boost investing, as any lifetime allowance tax charge would punish those who enjoy strong investment growth.

‘We’d urge all parties to focus on keeping pensions as simple as possible and avoid turning pension tax into a political football.

‘By their very nature pensions are a tool for long-term planning and the public need to be confident that governments won’t move the goalposts every five minutes.’

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says the outcome of the election will bring some much-needed clarity on the lifetime allowance.

‘The Conservatives scrapped it, but Labour has said it wants it reinstated. As yet, we don’t know how they would do this. Such confusion brings unnecessary complexity to people’s long-term planning, and we look forward to its resolution.

‘Any reform of the pension tax system should be done with the aim that people are properly incentivised to save for their futures, without having to worry about being tripped up by complex rules.’