A change in parliament could be reflected in the lifetime allowance, according to Rosalind Connor, managing partner at ARC Pensions Law.
Speaking on a webinar organised by Pensions Playpen earlier this week (April 18), Connor discussed the changes to the lifetime allowance.
In a shock announcement last month, chancellor Jeremy Hunt abolished the lifetime allowance on pension pots altogether.
As part of his Spring Budget, he said the LTA charge will be removed from April 2023 before the allowance is abolished entirely from April 2024.
However, despite advisers welcoming it, Connor said it could change further.
“As a matter of law, you can make the tax law say whatever you like,” she said.
“What I perceive labour doing is reviewing this and restructuring it. I don't see it likely that Labour will say ‘oh let's just act as if nothing happened on April 6 2023’ because apart from the fact that just annoys everybody, this is the opportunity to review a system that's been in place for the better part of 20 years, which we all know doesn't work perfectly, is fiddly in certain places and has unintended consequences.”
Rachel Reeves has said Labour will oppose the LTA changes, but Connor argued Reeves is saying that if a Labour government comes in, it won't be that Labour will just reinsert what was there before.
“Do I think that there's something Labour might do there? Yes. I just don't think it's going to be as straightforward as that they'll just reimpose everything.
“I think they'll look at it in the round. That to me, is the sensible thing to do and that's what they'll probably be advised to do rather than just try and go backwards.”
LTA versus annual allowance
Connor also discussed the annual allowance which is still in place.
She said the LTA was removed - according to the chancellor - in order to help people, specifically doctors, who might be incentivised to give up work because of the charges on their pension.
“There was a lot of noise a few years ago about doctors saying 'I don't particularly want to go back to work when I'm coming to retirement, because if I just do a little bit of work, I am suddenly hit with all these pension tax charges',” she said.
“The annual allowance charge is one people really don't like because it's when you're being charged tax on money you don't have.
“LTA charge is on money you have in the sense that you are paid some money and actually you have to give some of that back or some of that is retained to pay the tax.”
Connor explained that if an individual is subject to an income tax charge of 70 per cent, they may be unhappy, but it essentially means they just get a smaller income.
It doesn't mean that someone is charging money for a thing they haven't got and that’s the problem with the annual allowance.
“I understand it happened, particularly to doctors who had long service,” she said. “If they did work in a DB scheme, the way that the accrual works meant that they would be subject to an annual allowance charge on the accrual. The accrual means they're not getting the money and you are getting people whose net income after tax, from the work they were doing, was entirely being swallowed by then having to pay the annual allowance charge.
“So effectively, they're saying 'why would I work because the effect of it is that my pension goes up, but I haven't got my pension'. The effect of it is I have to pay the government money to work or not get a salary.”
Connor said that is obviously an issue for people but it is to do with the annual allowance.
“As I understand it, that was the biggest complaint,” she added. “I'm not saying people wouldn't like to not have an LTA but in that particular problem, the annual allowance was the issue.”
The LTA reasoning
She said if this was the issue the government was trying to resolve, the LTA doesn’t necessarily get them there.
“I do wonder if part of the motivation behind the people in Treasury signing it off is the cost reward ratio, the cost benefit analysis,” she said.
“I was told when I started off as a lawyer that the government's favourite tax is stamp duty because stamp duty is a voluntary tax you don't have to pay.
“It’s just if you don't pay for those things you're not allowed to do things. For example, if you buy a property, you don't have to pay stamp duty but if you don't, you can't register your ownership and can't get a mortgage and you'll have difficulty proving you own it and it'll be really hard to sell. But you don't have to pay the tax.”
She explained that because it's a voluntary tax, people self-police so the government doesn't have to spend a lot of time chasing people for their failure to pay.
“So you don't really have to make much money from stamp duty as a government for the Treasury to like that as a tax because the reward compared to the cost of managing it is extremely high,” she said.
“I'm not criticising it but that is an analysis and I do wonder if the LTA charge is expensive and doesn't bring in a great deal.”
She explained that if you look at the LTA structure as a whole, it is quite complex.
“It's a lot of effort for us but it's also quite a lot of effort for HMRC. They've got all these notifications coming in and then keeping an eye on all this stuff and having to check this number against that number the whole time.
“Then of course there are all the protections people can apply for. It's very time consuming and therefore expensive for HMRC to run."
sonia.rach@ft.com
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