Workers abandon plans to restore a lifetime cap on tax-free pension savings

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Labor has abandoned plans to bring back the lifetime pension allowance, in an £800m U-turn which will be welcomed by wealthier savers including hospital consultants and executives.

Rachel Reeves, the shadow chancellor, has rejected the proposal from Labour’s election manifesto, to be published on Thursday, because it would add uncertainty to savers and be complex to reintroduce, her allies told the Financial Times.

The move is also a sign of Labor seeking to de-risk its election campaign, the party currently leading the Tories by around 20 points while avoiding tax-raising policies that could be attacked by the Tories.

Allies of Reevess said the party had not earmarked the £800m that would have been raised from reintroducing the LTA for any of Labour’s spending plans. Will have [be] no black hole as a result, one said.

In his Budget last year, chancellor Jeremy Hunt scrapped the lifetime pension allowance, which put a cap on how much people could save or benefit from investment growth in their pensions before tax kicked in.

The move, which came into effect in April 2023, was welcomed by top savers, including senior NHS doctors and other public servants, who were most at risk of breaching the old cap of £1.073m.

In 2021-2022, around 11,000 people paid an average fee of 40,000 each for pension savings that exceeded the limit. The Office for Budget Responsibility billed the removal of the cap as an $800 million annual tax cut.

At the time, Reeves vowed to reverse the change, saying it was the wrong priority, at the wrong time, for the wrong people.

However, she said a Labor government would draw up specific rules for NHS doctors when it brought back the LTA to avoid what unions claimed would be an exodus of senior hospital staff.

Until a few weeks ago, the party had remained committed to the LTA but had not come out with details on how the permit, a complex piece of tax legislation, could be easily rolled back.

Last month, the FT revealed that thousands of investors with large pension pots were left in limbo because of errors in the LTA repeal bill, which were not fixed before an election was called for July 4 by Rishi Sunak.

A Labor source said Reeves did not want to add to the uncertainty. The Tories have failed their policy to scrap the lifetime allowance, with thousands of people nearing retirement being left in limbo because of mistakes in the legislation.

The source said Reeves would sort out the mess, adding: Labour’s priority is to restore stability and security to the economy.

In the absence of a plan to protect doctors from the LTA, the British Medical Association, the doctors’ union, warned last month that bringing back the LTA risked an exodus of senior doctors who were critical of reducing waiting lists, a key Labor promise. .

Dr Vishal Sharma, chair of the BMA’s committee of consultants, said: Since Labor announced its initial plans to restore lifetime allowance, the BMA has lobbied the shadow team to warn them of the risks to the NHS of doing so this. He added that it was welcome that Labor had listened to our concerns and reconsidered these plans.

Tom Selby, director of public policy at AJ Bell, an investment platform, said Labor deserved credit for recognizing the complexities of reintroducing the LTA and scrapping the plan, giving savers confidence to plan for the future.

While wealthier pension savers will welcome the move, there will be more fear if Reeves curbs other pension tax breaks if she becomes chancellor, particularly the pension tax relief scheme.

In 2016 Reeves, then an MP but a former shadow work and pensions minister, proposed setting a flat rate of pension tax relief at 33 per cent, below the 40 per cent tax rate that paid by the highest earners.

Reeves’s spokesman said this was not Labor policy and there were no plans to curb tax relief for the highest earners, while refusing to rule out such a move outright in the next parliament.