The Labour party is reportedly planning to abandon plans to reinstate the Lifetime Allowance, which would provide much-needed certainty to people’s retirement planning.
The Lifetime Allowance was the maximum you could save in your pensions over your lifetime, without having to pay any extra tax charges when you took money out of them. It was abolished by the current Chancellor Jeremy Hunt in April 2024 to encourage pension savers to stay in the workplace longer and continue paying into their pensions without being penalised.
However, there is an element of the Lifetime Allowance that remains. The maximum pension tax-free cash lump sum that you can take is capped at £268,275, or 25% of the old Lifetime Allowance and is known as the Lump Sum Allowance (LSA). This means that even though it’s now possible to build a larger pot without incurring a tax charge, your tax-free cash lump sum won’t increase with it.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “First it was in, then it was out, then it was back in again – sort of. The game of Lifetime Allowance hokey cokey looks to have finally drawn to a close, with briefing that Labour will drop plans to reintroduce the controversial tax. The news will be greeted with a sigh of relief by people who can now plan ahead for their futures with more certainty. There were still tweaks to the rules in legislation needed to finalise the removal of the LTA when the election was called. It will be a relief to those planning their retirement that Labour have committed to finish the job.”
Here, we explain how the Lifetime Allowance being reinstated could have affected you, and how you can ensure your pension savings are working as hard as they possibly can for you.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
Why did Labour originally want to reinstate The Lifetime Allowance?
Money held in a pension is usually exempt from Inheritance Tax, so removing the Lifetime Allowance provides wealthy pension savers additional shelter from IHT, giving them a tax-efficient way to pass wealth onto the next generation. You can read more about pensions and Inheritance Tax in our guide Can my pension be used to reduce inheritance tax?
Labour originally wanted to reinstate the Allowance to remove this tax break for high earners, but doing so could prove fiendishly complicated and encourage higher paid professionals to retire to avoid tax charges.
Jason Hollands, managing director at wealth management firm Evelyn Partners, said:
“Labour’s plans to reinstate the pensions Lifetime Allowance sprang from a somewhat knee-jerk reaction to Chancellor Jeremy Hunt’s surprise announcement that the Lifetime Allowance would be scrapped in his 2023 Budget. If reintroduction of an LTA is absent from the Labour manifesto on Thursday that will be welcome news, as the prospect of yet more tangled legislation to resurrect this punitive tax penalty on large pension pots and public sector pensions has caused considerable uncertainty over the last year for those deliberating whether or not to add to their savings.
“The Lifetime Allowance had perverse consequences for public sector professionals with generous defined benefit schemes, including fuelling early retirement by doctors and deterring medical consultants from taking on extra surgical work. Reintroducing it, other than at a very high level, would have jeopardised the need to clear NHS backlogs. For private sector employees with defined contribution pensions, the Lifetime Allowance both deterred people from building up their retirement provision and penalised those who made good investment choices – as investment growth could drive a pot over the Allowance.”
You can learn more about public sector pensions in our guide How do public sector pensions work? and about how pension allowances work in our article How do pension allowances work?
How else could pensions be affected by the election?
We will have to wait a couple of days to see which other pensions-related measures will be outlined in party manifestos. However, we do know that the Conservatives have pledged to introduce a ‘quadruple lock’ for the State Pension. This would mean that the personal allowance – which is the amount of income you do not have to pay tax on each tax year – will rise with the triple lock (by inflation, wage inflation or 2.5% – whichever is higher), so the State Pension would always remain under the taxable threshold.
Turning to Labour, Mr Hollands said: “One potential sting-in-the-tail could be a move to make defined contribution pension assets part of a persons’ estate for Inheritance Tax assessment purposes. Other areas to watch for are changes to upfront income tax reliefs, the size of the annual allowance or the amount of tax-free cash that can be taken from private pensions.
“Above all the majority of savers, retirees and their advisers would welcome a period of certainty and stability when it comes to the taxation of pensions – and private pension saving in the UK would certainly benefit from that too.”
Learn more in our article What the election could mean for your pension.
Finally…
It can be difficult to know how best to maximise your retirement savings, particularly during periods of political uncertainty.
The Government’s Pension Wise service, run by the Pensions Advisory Service and Citizens Advice, provides people aged 50 and above with one or more defined contribution pensions with free guidance on their pension options at retirement. You can give them a call on 0800 138 3944 to book a free appointment, or you can book one via the website.
It’s always worth taking advantage of a free appointment with Pension Wise, but if you want advice that’s tailored to you specifically, you’ll need to seek professional independent financial advice, as Pension Wise can only provide general guidance and not individual recommendations. A financial advisor can let you know what you need to do to ensure you’re on track for a comfortable retirement, and help you to make the right choices, regardless of who wins the election.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.