Analysis from LCP has found that reinstating the lifetime allowance would be far from straightforward and steps may need to be taken to make sure people do not rush to avoid any tax charges.
Analysis from consultants LCP has found that the LTA is not just an issue for ‘the top 1 per cent’.
It found that 4 to 6 per cent of those in the run up to retirement with pension savings are potentially affected, perhaps around a quarter of a million people.
The paper, published on Saturday (November 4), assumed that Labour would reinstate the LTA at its 2022/23 level, though the party has yet to specify a level.
This comes as in his March 2023 Budget, the chancellor announced plans to abolish the LTA, a lifetime limit on the cumulative amount of pension savings which can be drawn without incurring an additional tax charge.
Within hours of the announcement, the Labour party said that it opposed this measure and would reverse it if it were to win the next general election.
Labour also said it would introduce separate measures to ensure that senior NHS doctors were not encouraged to retire early as a result of the reintroduction of the LTA.
If the LTA were to be reintroduced, the new government would need to consider whether ‘transitional protection’ is needed for those who had, in good faith, taken advantage of the LTA changes from April 2023, LCP said.
Many may have taken advantage to build up their pension savings beyond this level but could now face a tax charge if the LTA was reintroduced before they accessed their savings.
More generally, LCP questioned whether everyone would start under a re-introduced LTA regime with the ‘LTA used up clock’ re-set to zero.
Or the government may try to estimate how much of the LTA people might previously have used up and use this as a baseline for how much remaining LTA was available to them.
Steve Webb, partner at LCP, said: “While reinstating the LTA may be attractive from the perspective of political messaging, the practicalities and risks associated with doing so would appear to be daunting.
“It is not as simple as just pasting back into legislation every line which has been taken out.
“As soon as the result of the election is known – and even in the run-up to the election - there could be a flurry of activity as people seek to make the most of their pension savings before a lifetime limit on tax relief is reintroduced.”
Drive to advice
LCP said if it became widely expected that a change of government was imminent, this could drive a lot of financial advice and individual pension decisions.
Possible behavioural impacts could include: those with large DB pensions retiring early; in the specific case of NHS doctors, the potential Labour government might need to specify with some degree of certainty how these doctors will be protected from LTA charges in the new regime.
“As it would be challenging for a new government to implement this policy by April 2025, emergency legislation might be needed to avoid a haemorrhaging of tax revenue as people rush to draw their pensions,” Webb said.
“A new government would also need to be very clear to senior doctors that they need not be concerned that by carrying on working they risk incurring large tax charges.
“Without this, the new government’s plans to improve the NHS could be undermined by an early exodus of senior doctors.”
Those with higher incomes and unused annual allowances from previous years might also choose to ‘pile’ money into their DC savings and then crystallise them before the LTA was reintroduced (or before a general election).
Webb added: “Although this issue has been talked about as one which affects only ‘the top 1 per cent’, in practice hundreds of thousands of people who are within a decade of retirement will be taking a very close interest in what any prospective new government says about its plans for the LTA.”
The paper also said that those who had already built up large DC pots might bring forward the point at which they crystallise them, to avoid potential LTA charges.
This would reduce the amount of tax revenue a future government could expect to gain by bringing back the LTA.
The firm explained that implementation in time for the first financial year after a general election - starting in April 2025 - might be exceptionally difficult, and this could increase the need for interim legislation to avoid large scale post-election pension withdrawals purely designed to avoid LTA charges.
“A new government might also find that unless it had made its plans very clear before the election, it would need to deal with the consequences of an exodus of senior NHS doctors,” it added.
HMRC and the Treasury have been approached for comment.
sonia.rach@ft.com
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