The Spring Budget announced1 that the Lifetime Allowance (LTA) is being abolished and annual limits on pension savings are being increased. In response the Labour Party pledged that it would “reverse the changes to tax-free pension allowances2”.
The extent of its pledge has not been articulated, although it certainly includes the LTA. The numbers quoted by Labour suggest that the increase in the Money Purchase Annual Allowance (from £4,000 to £10,000) might survive a change in government, but that they would reverse the increase in the standard Annual Allowance (from £40,000 to £60,000) and the changes to how this is tapered down for high earners. Nor is it clear precisely what reversing the abolition of the LTA would mean. Would policy revert to the pre-Budget status quo ante, with an LTA of £1.0731m due to be indexed from 2026? If so, would the maximum tax-free cash return to 25% of the LTA, or would a Labour administration keep this frozen at £268,275, as will be the case following the Budget changes?
However, the purpose of this article isn’t to unpack Labour policy on pensions taxation. The detail that exists is (understandably) little more than the party’s immediate response to the Budget; and while this may be fleshed out ahead of the election, particularly if the party faces sustained questioning on it, at least some of the details would be left to civil servants to work out once a new government were elected. Instead, our focus is on the challenges of reinstating the LTA.
Starting with what, to many, might be the biggest concern, the issue of retroactivity. Might an incoming government backdate any changes to the pensions tax regime, potentially resulting in tax charges becoming due on contributions that were made in good faith and that were non-taxable under the rules in place when those contributions were made?
A government can make any legislative changes it deems appropriate (subject to Parliamentary process and approval). However, established practice and convention is that governments do not change the tax rules retroactively. Any attempt to do so might be unlawful under the European Convention on Human Rights (of which the UK currently remains a member) and, possibly even more significantly, would undermine confidence in the reliability of the law, which would be damaging, both domestically and for international investor confidence. An incoming government (and perhaps particularly a Labour government) would be keen to avoid this.
If governments had not believed that it was legally necessary to protect existing pension rights when the LTA was reduced (2012, 2014 and 2016), it is questionable whether they would have chosen to do so. But they did, and transitional protections have been given not just by a Conservative (or Conservative-led coalition) government. The 2006 complete overhaul of the pensions tax regime, introduced by a Labour government, protected entitlements accrued under the regime being replaced. It is conceivable that past governments have considered a zero-protection approach legal, but not politically possible. But would an incoming government wish to test that legal position, almost certainly resulting in protracted high-profile legal battles – and, if they did, what if they lost? The current government is undertaking a gargantuan task to implement the McCloud remedy3 (correcting the unlawful age discrimination found to have taken place when the government reformed public service pension schemes in 2015). Seeking to undo tax rule changes that apply across the entire pensions’ regime would likely be equally harrowing.
Assuming forward-looking change only, reintroduction of an LTA following a period of operating without one would require a new protection regime for anyone whose pension savings exceeded this “new” LTA. An excess might be attributable to investment returns and/or additional savings (further accrual/increase in pensionable salary within a DB scheme) or an excess might already have existed on 6 April 2023, when the LTA charge disappeared.
Assessing the value of benefits of all individuals close to or above the reintroduced LTA would be a massive undertaking, hugely complex and burdensome for both pension schemes and HMRC. Equally challenging would be effectively communicating the changes to members. Moreover, although restoring the LTA would only affect people with high levels of pension wealth, the perception that governments are prepared to move the goalposts on whether contributions already paid incur a tax penalty could undermine trust, both within the tax system and more generally.
If, despite the complexity and communication challenges, a Labour government chose to reintroduce the LTA, it would be reinstating a system widely criticised – especially in the context of defined contribution pensions, where investment performance can lead to an LTA charge.
Labour has itself been critical of the regime it now suggests it wants to keep. In September 2022, the Shadow Secretary of State for Health and Social Care (Wes Streeting), described the LTA as “crazy”, adding that he wanted to abolish it4. Following the Budget and his party’s declaration that it would reverse the changes, Mr Streeting said he had been talking about its application to doctors5 and it is true that what he referred to as “crazy” was a cap that “deters many experienced doctors from working late into their careers”. However, it is unclear why it would not be similarly crazy to have (or reintroduce) a cap that deters senior/experienced teachers, police officers etc from working late into their careers?
Labour acknowledges that, if the LTA were reintroduced, a solution would be needed for senior NHS clinicians, and the party favours a targeted unregistered pension plan, such as that already in place for the judiciary. If such an arrangement were to be established, it would still be necessary to allow protection of members’ benefits within the existing registered NHS scheme at the date of the LTA’s reintroduction. And if it were not possible to establish an unregistered plan to coincide with the reintroduction of an LTA for the period in which there was no cover, senior clinicians within the NHS would once again face a problem that had already been “solved”.
If the LTA were reintroduced and an alternative solution found for the NHS, the government would come under huge political and employee-representative pressure to make that same alternative available to other public sector workers. And the same issues regarding timing of availability and the return of a problem previously solved would be experienced by a larger group.
While political parties are invariably critical/dismissive of numbers presented by other parties, the current Chancellor, giving evidence to the Economic Affairs Select Committee6 said that “by the time you have done a scheme for doctors – and, by the way, a scheme for senior police officers and head teachers and other very important public services – it could end up being nearly as expensive as what we did on the lifetime allowance, and also more regressive”.
If the Labour Party wins the next general election, it seems unlikely that the pensions tax regime as it stands following the Budget will remain intact for long. How a pledge to restore the LTA would be implemented is not entirely clear and although retroactive application has not (to our knowledge) been ruled out, there are good reasons to consider this unlikely. In the absence of retroaction, a complicated new protection regime would be necessary.
It is also quite possible that a Labour Government could opt for more fundamental change that would create winners and losers further down the income scale. This could be either instead of, or as well as, action targeting those with the largest pensions, and it could first see the light of day as a manifesto promise or after their feet are under ministerial desks. Similarly, a re-elected Conservative Government could dust down old proposals for change when delivering Budgets that are less focused on interventions to boost labour supply and averting NHS crisis in the last winter before the next general election. We will discuss the prospects for such proposals in future articles.
1. Spring Budget 2023.
2. Rachel Reeves, Shadow Chancellor of the Exchequer.
3. Research Briefing: Public service pensions – response to McCloud.
4. Daily Telegraph interview “The Conservatives are planning to lose the next general election” by Harry de Queteville, 2 September 2022.
5. Wes Streeting Tweet, 16 March 2023.
6. House of Lords: Economics Affairs Committee – evidence session, 21 March 2023.