UK General Election: No return for the pension lifetime allowance but other pension reforms likely

Permanently dropping the pension savings cap would offer welcome continuity for people planning for their retirement. However, pension changes are still to be expected under a new government.

| 6 min read

The Labour Party has said it has scrapped plans to reintroduce the pension lifetime allowance (LTA) should it win the general election. With the party holding a substantial lead in the polls a change in government is likely, so this is a welcome move for those with larger pensions negotiating the complexities of planning their retirement.

What is the pension lifetime allowance?

The LTA is the total amount an individual can build up in a UK pension scheme without incurring a tax charge, typically tested when taking benefits for the first time or upon reaching 75.

The cap was set at £1.073m before being abolished by the current Chancellor, Jeremy Hunt, as part of the 2023 Spring Budget. Previously, Labour had said it would reintroduce the allowance should it win the next election.

What does it mean for pension savers?

The permanent axing of the LTA should help many people build a better retirement and steer clear of complexity. It could also mean some skilled, experienced individuals with large pension pots decide to work for longer, which should be good news within both the public and private sector. With the limit ruled out by both major parties, workers can now accrue further pension provision without worrying about being penalised with a retirement tax or complicating their affairs.

This is especially relevant for certain NHS professionals where the LTA had frequently been cited as an obstacle to remaining in the workplace. Defined benefit pension schemes are usually valued at 20 times the pension income in the first year plus any lump sum, so a comfortable but not outlandish pension of just over £50,000 a year had historically been caught by the limit. Following rumours including there would be a carve out for the NHS and other public sector workers, or the establishment of a higher threshold, Labour appears to have concluded these options would have resulted in unfairness and unwarranted complexity.

Cross party consensus on the issue of pensions and retirement is very welcome. A simple, stable pension regime is supportive of self-reliant retirement provision as well as wider aims to boost UK investment. What matters most for people planning for their futures is consistency of policy. Repeatedly re-writing the rules creates a complex and uncertain landscape which undermines confidence in the system. The removal of the lifetime cap is an important sign of much-needed stability, allowing people to move on with their retirement planning.

Could there be other retirement tax changes?

1. Inheritance tax liability on pension pots

It’s possible that recent fresh clarity on the LTA makes other pension changes more likely. One facet likely to be looked at by a Labour government is the ability to pass pension pots on inheritance tax (IHT) free to nominated beneficiaries.

With no LTA there is currently potential to cascade pension wealth down the generations with income tax paid on withdrawals, should they be taken. It would seem likely that with the LTA permanently removed by both major parties this area could be inspected for reform.

2. Tax free lump sums on retirement

Pension tax free cash might be under the spotlight too. With personal pensions such as a SIPP, lump sums can be taken at any time after minimum retirement age, with the first 25% usually able to be taken tax free and the remainder taxable. However, there is now a cap on tax free cash set at £268,275. While reinstating the LTA would have been a complex move in terms of unpicking the legislative changes that have been made, this monetary limit on tax free cash appears a softer target. As it stands it will be frozen, but it could be reduced.

As a reminder, when the lifetime allowance was abolished, it spawned with three replacement allowances for larger pots: the lump sum allowance, the lump sum and death benefit allowance and the overseas transfer allowance. The latter two were set at the previous level of the lifetime allowance, £1,073,100. Meanwhile the tax-free element of certain lump sums was capped at £268,275 – 25% of the LTA – for those without previous pension ‘protections’. With the remainder of any pension taken as taxable income beyond the tax-free cash available the system results in a progressively higher tax burden on combined pension pots significantly over £1m.

It’s possible these recent monetary limits could be cut over time by a future government. It would be relatively straightforward, and as technical complexities they are not widely understood. Those with larger pension funds may find that although they have renewed freedom to build up a sizable amount, some of the advantages around drawing money out, as well as the death benefits, may be whittled away.

Read more: How to pay less tax during retirement

The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change. The tax treatment of pensions depends on individual circumstances and is subject to change in future. This article is solely for information purposes and does not constitute advice or a personal recommendation.

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