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Lifetime appointment: Now that the election is underway, pressure will be placed on Labour’s shadow chancellor, Rachel Reeves, to clarify the party’s plans.
Savers with high pensions are interested in whether Labor plans to limit how much they can save for retirement without facing a tax penalty.
The Conservative government abolished the old £1.073 million lifetime allowance last year, but Labor said at the time the party would bring it back if elected.
Now that the election is underway, pressure will be placed on Labor to clarify its plans and, in particular, what new limit it has in mind.
The lifetime allowance was much higher, at £1.8m, when Labor was last in office, but was slashed to £1m under Conservative chancellor George Osborne, before receive small increases under the government of his successors.
We provide details of the controversy over the lifetime allowance in our guide to what the election could mean for your pension.
Below we have more information on how it worked and the important legacy lifetime allowance rules that people on high pensions should be aware of.
We also gathered expert views on whether it will be reset, how it could be done, and what steps could be taken now.
What is the lifetime allowance?
This was the total limit of £1,073,100 that people could have in their pension pot without facing tax penalties.
Chancellor Jeremy Hunt abandoned it from April 2023. However, there were still some technical glitches that only came into effect in April this year, and there are important legacy rules, so it’s not as simple as that.
Meanwhile, the annual allowance remains in effect. This is the standard amount you can put into your pension each year and qualify for tax relief on what you saved.
It was increased from £40,000 in April 2023 and is currently £60,000, or up to 100 per cent of your annual income if it is less than this.
The annual allowance includes your own and your employer’s contributions to a pension, and the tax relief itself, although the rules are more complicated for higher earners.
One of the reasons the system was revised was to appease senior doctors, who were being penalized due to work practices such as shifts and overtime in the medical profession and, in some cases, faced large and unexpected tax charges for exceeding allocations.
If you already have a large sum saved in a pension, it is sensible to pay for financial advice on legacy lifetime allowance rules to ensure you don’t make costly mistakes.
This is especially the case for tax-free lump sums, if you have a “fixed shield” – which allowed people to freeze their lifetime benefit at older, higher limits – and if you have already started drawing your pension.
Labour’s possible plans to reinstate the lifetime allowance if they win the election should also be taken into account if this could affect their retirement plans.
What the money experts say: What could Labor do?
“With the election just around the corner, Labor will have to formalize its plans for the lifetime allowance,” says Jon Greer, head of retirement policy at Quilter.
Under the last Labor government the lifetime allowance ended up being £1.8m, which would now be worth £2.5m adjusted for inflation since
Jason Hollands, Evelyn Partners
‘So far the party has been cornered in a number of situations following knee-jerk reactions to the Conservatives’ complete abolition of the tax.
‘Labour is likely 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 promise to reinstate the lifetime allowance the day after its scrapping was announced is included in its manifesto or quietly abandoned.
“They may conclude that it would simply resurrect problems with public sector workers, including medical professionals, with generous defined benefit pension plans, and that a better way to take advantage of large pension taxes is to modify the free lump sum tax or make pensions part of an inheritance for inheritance tax purposes.
STEVE WEBB ANSWERS YOUR QUESTIONS ABOUT PENSIONS
How might the reintroduction of the lifetime allowance work?
“If the lifetime allowance is reintroduced, the key question will be at what level,” Hollands says.
‘There is also no reason why a future Labor government should commit to reintroducing the lifetime allowance at the level of £1.073 billion where it ended under the Conservatives.
“Under the last Labor government the lifetime allowance ended at £1.8m, which would now be worth £2.5m adjusted for inflation since then.”
Hollands points out that the lifetime allowance has been removed from the statute book, so a future government cannot simply change it back the day after the election.
New legislation would have to be passed, probably a finance bill after a budget, and it is unlikely that a new lifetime allowance could be in place until April 2025, he adds.
‘Retrospectively applying a new lifetime allowance would be very controversial, open to question 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 affected could gain protection, usually by ceasing additional funding.”
Greer also believes that the reintroduction of the lifetime allowance will take some time.
But he warns: “If that is the direction of travel, then some form of anti-forestry legislation is likely to be introduced ahead of wider changes to prevent what are perceived as individuals taking advantage before a full change comes into effect.” “.
“This approach would allow Labor to take the time necessary to modify the system carefully, avoiding another hasty legislative change without fully understanding the complexities involved.”
Greer says how and when Labor implemented the changes would be crucial, if at all.
‘Labour must avoid the pitfalls experienced during the Conservatives’ abolition of the lifetime allowance, which serves as a model for how not to implement major tax changes.
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‘The details of the policy were developed on the fly, with very little time and an unclear understanding of the impact of the new regime.
“Labor must opt for a measured and well-considered approach that ensures any changes to the current regime are made in a robust manner.”
Will there be an “exclusion” for public sector workers, such as doctors?
“Rumors that Labor was considering an exclusion for public sector workers have generated significant speculation, but the party was silent on the matter once it was widely maligned by the industry,” Greer says.
‘The problem with public sector workers will persist for Labor if they want to reintroduce the lifetime allowance unless it is reintroduced at a higher level for certain sectors.
“An exclusion appears to be unpopular as it creates an “us and them” situation in the tax system where public sector workers have more beneficial tax rights than those in the private sector.”
But Greer adds that the design of the pension tax system appears to be – and will likely continue to be – driven primarily by its impact on some public sector workers.
What should people with high pensions do?
The lifetime allowance no longer exists by law, retrospective tax changes are highly unlikely and in the past “fixed protection” could be claimed at different levels, Hollands says.
This means there is potentially a limited window of opportunity for people who might have been deterred by the lifetime allowance to save for their pensions again, he says.
“Therefore, making use of this window should be a high priority for those looking to bolster their retirement fund.”
Should the lifetime allowance be reinstated?
“This would be a retrograde step, adding unwanted complexity to an already complex system,” says Tom Selby, director of public policy at AJ Bell.
‘It would also run directly counter to broader efforts to boost investment, as any tax burden on lifetime allowances would punish those enjoying strong investment growth.
‘We urge all parties to focus on keeping pensions as simple as possible and avoid turning the pension tax into a political football.
“By their very nature, pensions are a tool for long-term planning and the public must have confidence that governments will not change targets every five minutes.”
Helen Morrissey, head of superannuation analysis at Hargreaves Lansdown, says the election result will bring much-needed clarity on the lifetime allowance.
‘The Conservatives ruled it out, but Labor have said they want to reinstate it. As of now, 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 must be carried out with the aim that people are adequately incentivized to save for their future, without having to worry about being misled by complex rules.”
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