Yahoo Finance What will happen to the pensions lifetime allowance?
The state pension and the triple lock has hogged many a general election headline in recent days, but it’s by no means the only pension issue that could affect people’s decisions at the ballot box in July.
The outcome of the general election should also bring some much-needed clarity on the future of the lifetime allowance (LTA).
The LTA was the maximum amount someone could build up in their pension without incurring a tax charge. Up until 2023 it stood at £1,073,100 for the majority of people.
It was a much-derided policy and when the Conservatives announced plans to abolish it the decision was widely praised.
However, Labour hit back saying they would reinstate it should they win the election, saying that the abolition disproportionately benefited higher earners. This is true, but given that many of these high earners are NHS consultants — many of whom could be looking to exit the service at a time when it is creaking at the seams — there is a dilemma.
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There was discussion that Labour would introduce a "carve out", which means certain groups such as NHS consultants would not be affected by a reinstated LTA — but this could prove complex. Not much has been said since and we await the Labour manifesto to see if it is mentioned. In the meantime, the industry has cracked on with its abolition.
This confusion has unsettled many people — the abolition of the LTA encouraged many people to plough more money into their pensions.
Recent Hargreaves Lansdown data taken towards the end of the tax year showed the number of clients using carry forward to invest more than £60,000 in their SIPP had jumped by 50% as increased allowances and the removal of the LTA breathed new life into pension planning.
But what does this mean if the LTA is subsequently reinstated? The likelihood is that if it did come back then there would also be some kind of protection regime introduced for those who have breached it.
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It’s a confusion that needs to be cleared up sooner rather than later. People need certainty when making plans for their future and regular changes undermine people’s confidence. Any further change should be taken as part of a wider review into the pension tax system. Any further reform should be done with the aim of properly incentivising people to save for their futures without having to worry about being tripped up by complex rules.
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