Shadow Chancellor has pledged that a Labour
Government would reintroduce the pensions lifetime allowance.
This was abolished by Chancellor in his March 2023 Budget and
was a tax cut for the small number of individuals who had, or
would in future have, accumulated pension pots worth over
£1,073,000.
Our system of pensions taxation is overly generous to high
earners who get sizeable employer contributions (as these escape
National Insurance contributions) and accumulate big pension
pots. In the absence of more widespread reform, there is some
merit in Labour's proposal to bring back something like the
lifetime allowance to limit the scope of these subsidies, and
there would be advantages to doing this swiftly. Reintroducing
the charge at its previous level might raise almost £800 million
a year. But it would represent a missed opportunity to improve
and rationalise the system of pensions taxation. That could
include – among other things – a more generous annual allowance,
a reduction in the cap on the amount that can be taken from a
pension pot completely free of income tax and a new cap on the
amount of pension wealth that can be bequeathed at death free of
inheritance tax. In fact, the case for this latter set of reforms
is stronger than the case for reimposing the lifetime allowance.
If these latter reforms were included in a policy package, there
would be a case for setting any reintroduced lifetime allowance
at a higher level than previously.
Carl Emmerson, Deputy Director of the Institute for
Fiscal Studies and co-author of the piece, said:
‘Given the current way in which we tax pensions there is a case
for reintroducing a lifetime allowance. But that is mainly
because so many other aspects of the system are overly generous
to high earners who get sizeable employer contributions and
accumulate big pension pots. Rather than a simple kneejerk return
to the system of two years ago, a new Labour Chancellor would be
well advised to implement a comprehensive and lasting reform
which could rationalise, simplify and make fairer the current
system of pension taxation whilst also raising revenue in the
medium term. The danger is that a reintroduced lifetime allowance
ends up being just another bump in the pensions tax road, and
another missed opportunity to rationalise the system with a
coherent package of measures.'
Mubin Haq, Chief Executive of the abrdn Financial
Fairness Trust, said:
‘Removing the pensions lifetime allowance was a giveaway to those
with the largest pension pots; in 2021-22 only 11,000 individuals
paid this charge with the average amount due being over £40,000
each. Reversing this change is right if other pension tax reliefs
aren't cut back. Better would be to implement reforms such as
reducing the maximum amount that can be taken tax-free from a
pension pot and closing the loophole which allows pension pots to
be passed on without payment of inheritance tax. These changes
would weaken the case for reintroducing a lifetime allowance at
the same level as it was before and could allow greater support
for those with smaller pensions.'
Read the briefing
here.
