Pre-Election Pension Decisions if Labour Reintroduce Lifetime Allowance
Published / Last Updated on 24/05/2024
What should we do to plan if Labour wins the General Election on Pensions and Lifetime Allowance?
Now that is a question that we cannot possibly answer with any certainty.
Spring Budget 2023 (Conservatives)
- Conservative Chancellor Jeremy Hunt confirms that the tax penalty for exceeding the pensions lifetime allowance (LTA) with by 0% for tax year 2023/24 and from 6th April 2024 the LTA is abolished in its entirety. Both these actions means that if you have built up pension benefits more than £1,073,100 you will face no tax penalty when taking benefits.
- In addition, the Conservatives introduced a new Lump Sum Allowance (LSA) meaning a maximum tax-free cash limits from all pension schemes of 25% of the old LTA (£1,073,100) = £268,275 as well as a Lump Sum Death Benefit Allowance (LSDBA) which is the maximum tax free lump sums that can be paid from your pensions as a serious ill-health lump sum before age 75 or any tax-free Lump Sum death benefits payable in the event of your death before age 75. The limit is £1,073,100 but may be higher if you have some form of higher LTA protection.
Labour’s Response
Labour said that if they were elected to power, they would reverse the LTA abolition, reintroduce but would make special provisions for NHS workers to try and reduce the numbers of high-level staff resigning or declining additional work as this would build greater pension entitlements resulting in more tax penalties.
A Problem to Come
There is clearly a problem in how Labour would reintroduce LTA.
Will Labour make LTA rules retrospective ?
- What happens to those who have crystallised pension benefits above LTA during tax years 2023/34 ad 2024/25?
- What happens to those that crystallised pension benefits in good faith as that is the current law?
- What happens to those that had Primary, Enhanced, Fixed Protection but started to make new pension contributions in good faith thereby losing old protections?
Will Labour make a new clean sweep with a line drawn with a brand-new set of LTA rules and protections from a given date e.g., the earliest we think this could be is an Autumn Budget and then law from 6 April 2025?
- What happens to current law after any Autumn Budget and any new laws from April 2025?
- Will this create a stampede of people acting to crystalise benefits before any new laws take effect in April 2025?
- Will Labour create an anti-forestalling rule to restrict actions from midnight of the Autumn Budget?
Our View
It is the same Treasury staff that advise the ‘government of the day’, whether that is Labour or Conservative, so we expect the results would be the same. This means we must look back to what has happened in the past.
- Labour introduced the LTA in 2006 at a much higher level of £1.8m, so if they did press ahead and reintroduce the LTA, we would expect them to come back with a higher level than the £1,073,100 to avoid high earner problems initially.
- Labour (as well as the Conservatives) have always offered protection to those that already exceed any new or revised LTA limits. We would expect the same.
- Labour will keep the lump sum restrictions introduced in April 2024 i.e., the LSA and the LSDBA. This will gradually mean that tax free cash lump sums will gradually become less valuable i.e., a smaller proportion of the pension fund (as it is capped at £268,275) for those with larger pension funds. This means that all that lovely tax relief at 40% and 45% will eventually be clawed back from those that received it as a greater proportion of their pension fund will be taxed whereas those with pension funds below £1,073,100 will till access 25% of the fund tax free.
- The Conservatives also imposed ‘anti-forestalling’ measures following a harmonisation of ‘input periods’ to tax year end for all i.e., when your annual allowance calculation (annual amount you can pay into pensions) known as the ‘pension input period’ used to be the company pension scheme year for company pensions and the tax year end for private pensions. This was to prevent a ‘buy now whilst stocks last’ rush to beat things ahead of the deadline changes to all being tax year end calculation ‘input period’.
- All the above were driven by the Treasury as well as the government of the day, so we expect similar actions if Labour does reintroduce LTA.
If Labour is elected and presses ahead, we believe the Treasury will press the reset the button to allow all of those that have already taken action and crystallised their pensions to not be penalised and a new ‘A’ day will be set with those with higher pension funds (above any new LTA level) able to protect what they have as well as not penalising those that have taken benefits ‘in good faith’ but with the same restrictions as before that if you have protection, you cannot contribute to or build up new pension funds or accruals.
Overall, this is a gamble. If you act now to crystallise your pensions ahead of any election or budget, then you have two potential outcomes:
- Labour does not reintroduce the LTA and you have triggered your pensions earlier than required and may be paying taxes on them that you need not have done.
- Labour does reintroduce the LTA and you may be glad that you did trigger pensions before any new rules came into force.
We Lean Toward Do it Now …
It is a gamble either way, but we are minded to say: “Better the devil you know”. You know the law today and you know you can crystallise pension benefits today with LTA gone i.e., you have no cap, i.e., no ceiling on the values of pension funds that you can crystallise, but come any new government and then an Autumn Budget, they may reintroduce LTA and impose anti-forestalling measures. If you are minded to, is it better to act sooner rather than later? A gamble yes, but at least you will have actioned your funds and know what your position is as we cannot see them making changes retrospective.
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