One of the biggest shadows hanging over financial planning is the proposed reintroduction of the lifetime allowance (LTA).
But if we assume we will have a new government soon and that it will bring back some form of LTA, how might they go about it?
It is worth noting that even abolishing the LTA has proven to be far from straightforward.
There are hundreds of references to it across multiple pieces of legislation and removing them without unintended consequences is proving challenging. This is particularly so given the government’s decision to retain a lifetime limit on tax-free cash.
Given the pressures on the NHS, we can ill afford to lose the services of experienced consultants
Similarly, reinstating the LTA would be far from simple.
There are at least three major challenges that would face a new Labour government which wanted to bring back the lifetime limit.
The first, in simple terms, is what to do about the doctors?
One of the main reasons chancellor Jeremy Hunt abolished the LTA is the evidence that senior clinicians were choosing to retire prematurely for tax reasons. Given the pressures on the National Health Service (NHS), we can ill afford to lose the services of experienced consultants. The Conservative government decided that abolishing the LTA was a “price worth paying” if it kept them working for longer.
A new government would be equally keen to avoid an exodus of senior public servants, and it would also face pressure from the trades unions to avoid tax changes which particularly hit senior public sector workers.
Simply reintroducing the LTA at its old level could represent a form of retrospective taxation and would widely be seen as unfair
Unless the Labour party is very clear – probably this side of the election – how its proposed carve-out for doctors will work, there is a risk its arrival in power will coincide with a highly unwelcome loss of top NHS staff.
The second challenge is what to do about people who have ‘filled their boots’, putting large amounts into their pensions following the abolition of the LTA. This could include those who had previously relied on various forms of ‘protection’, introduced following previous cuts in the LTA, and who had renounced that protection in favour of building up a bigger pension pot.
Simply reintroducing the LTA at its old (pre-April 2023) level could represent a form of retrospective taxation and would widely be seen as unfair.
A new government would either have to design a fresh form of protection or might have to bring back the LTA at a much higher level.
If a new government decided it wanted to take account of past crystallisations, this could be challenging
A third challenge would be what to do about those who had a mix of pensions they had crystallised and those they were yet to draw. Previously, these people might have used up a large chunk of their LTA, with limited scope for further tax-privileged saving. If a new government reintroduced an LTA, they would want to avoid re-setting everyone’s LTA usage ‘meter’ to zero, as this would allow such people to ‘double dip’ and enjoy another large slice of tax-free saving.
But if a new government decided it wanted to take account of past crystallisations, this could be challenging.
For defined benefit, they could perhaps infer from pensions in payment how much LTA was used up when the pension was first drawn. This was done in 2006 when the LTA was first created. But it would be far harder to reconstruct past defined contribution crystallisations, especially where the money was no longer within a pension or drawdown wrapper.
We might see emergency ‘anti-forestalling’ legislation to prevent people taking advantage of the window to April 2026 to max out on pension saving
Bringing back the LTA would be complex and could not be done quickly. If the election is in autumn 2024, it would be exceptionally difficult to implement these measures for April 2025, and a start date of April 2026 seems more realistic.
So we might see emergency ‘anti-forestalling’ legislation to prevent people taking advantage of the window to April 2026 to max out on pension saving.
While it is easy to say you will reinstate the LTA, it is a lot harder to do so.
Steve Webb is a partner at consultants LCP and was pensions minister 2010-15
Oh what a lovely mess.