Reinstating Lifetime Allowance ‘fraught with difficulties’

In his March 2023 Budget, the Chancellor announced plans to abolish the Lifetime Allowance (LTA), a lifetime limit on the cumulative amount of pension savings which can be drawn without incurring an additional tax charge. Within hours of the announcement, the Labour party said that it opposed this measure and would reverse it if it were to win the next General Election. Labour also said that it would introduce separate measures to ensure that senior NHS doctors were not encouraged to retire early as a result of the reintroduction of the LTA.

New analysis from consultants LCP, published today, has found that reinstating the LTA would be far from straightforward and that the Labour party may need to take steps both before and immediately after the election to make sure that large numbers of people do not rush to tap into their pensions to avoid any LTA tax charges. The paper assumes that Labour would reinstate the LTA at its 2022/23 level, though the party has yet to specify a level. Key findings of the paper are:

• This is not just an issue for ‘the top 1%’; we find that 4-6% of those in the run up to retirement with pension savings are potentially affected, perhaps around a quarter of a million people;
• Key issues for a new government to consider on reintroducing the LTA include:
  • Would ‘transitional protection’ be needed for those who had, in good faith, taken advantage of the LTA changes from April 2023, to build up their pension savings beyond this level but could now face a tax charge if the LTA was reintroduced before they accessed their savings?
  • More generally, would everyone start under a re-introduced LTA regime with the ‘LTA used up clock’ re-set to zero. Or would the government – as seems likely – try to estimate how much of the LTA people might previously have used up and use this as a baseline for how much remaining LTA was available to them?
  • Given how long it might take from an Election to passing detailed legislation in this space, would it be necessary to pass urgent ‘anti-forestalling’ legislation straight after an Election to avoid a rush of people crystallising their pensions to avoid a potential LTA charge?

If it became widely expected that a change of government was imminent, we could see this driving a lot of financial advice and individual pension decisions. Possible behavioural impacts could include:

• Those with large DB pensions retiring early; in the specific case of NHS doctors, the potential Labour government might need to specify with some degree of certainty and *before the General Election* how these doctors will be protected from LTA charges in the new regime; otherwise, senior doctors might prefer the more certain option of retiring when there is no LTA charge;
• Those with higher incomes and unused annual allowances from previous years might choose to ‘pile’ money into their DC savings and then crystallise them before the LTA was reintroduced (or before a General Election); similarly, those who had already built up large DC pots might bring forward the point at which they crystallise them, to avoid potential LTA charges; this would reduce the amount of tax revenue a future government could expect to gain by bringing back the LTA;

There is no doubt that reintroducing the LTA would be far from straightforward and would require difficult judgments of the kinds set out above. Implementation in time for the first financial year after a General Election (almost certainly starting in April 2025) might be exceptionally difficult, and this could increase the need for interim legislation to avoid large scale post-election pension withdrawals purely designed to avoid LTA charges. A new government might also find that unless it had made its plans very clear before the Election, it would need to deal with the consequences of an exodus of senior NHS doctors.

Commenting, Steve Webb, partner at LCP said: “Whilst reinstating the LTA may be attractive from the perspective of political messaging, the practicalities and risks associated with doing so would appear to be daunting. It is not as simple as just pasting back into legislation every line which has been taken out.

"As soon as the result of the Election is known – and even in the run-up to the Election - there could be a flurry of activity as people seek to make the most of their pension savings before a lifetime limit on tax relief is reintroduced. As it would be challenging for a new government to implement this policy by April 2025, emergency legislation might be needed to avoid a haemorrhaging of tax revenue as people rush to draw their pensions. A new government would also need to be very clear to senior doctors that they need not be concerned that by carrying on working they risk incurring large tax charges. Without this, the new government’s plans to improve the NHS could be undermined by an early exodus of senior doctors.

"Although this issue has been talked about as one which affects only ‘the top 1%’, in practice hundreds of thousands of people who are within a decade of retirement will be taking a very close interest in what any prospective new government says about its plans for the Lifetime Allowance”.