Should Labour vow to scrap the LTA reform – or moderate it?
Just when you thought it was safe to go back in the water….
NEW: Labour confirm they would reverse the decision to scrap the pensions lifetime allowance cap.
They call it “the wrong priority, at the wrong time, for the wrong people”
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— Nick Eardley (@nickeardleybbc) March 16, 2023
Don’t bin your LTA protection certificate yet!
The Labour party has broken the cross-bench pension consensus and vowed to scrap the LTA reforms , reckoning that the public won’t be fooled by a tax-break for the 1% currently pension millionaires.
It’s a decisive move but maybe not a smart one. There are a lot more people who aspire to be pension millionaires than will ever be one and they include a lot of younger people for whom the prospect of a pension pot with no lid is attractive.
It certainly makes for a difficult conversation between financial adviser and client.
I suspect that many advisers and clients will consider the interim between the proposed scrapping of the LifeTime allowance on pensions (April 2023) and the next election as a window of opportunity.
But political risks look to loom large over any short term tactics and I think the Labour Party would be better to scale down the promise and reintroduce the LTA at a more acceptable level.
Recent research by First Actuarial , suggests that had the original lifetime allowance of £1.5m been increased in line with CPI inflation since 2006, the 2023/24 figure would be around £2.4m. This shows the extent of the departure from the original policy intent of what was then described as pensions tax simplification.
Returning to a figure between these limits , might be a more sensible way forward for Labour.
Wrong priority?
The pension taxation forms were bucketed with policies targeted at those out of work for health and other reasons, and sit uneasily alongside the introduction of “skills boot-camps” and mid-life MOTs.
While the Office of Budget Responsibility estimate that the “return to work” package is likely to get 165,000 (around a quarter) of those missing from the workforce back in work, the measures that are likely to have most impact are around sanctions on those who are seen as malingering, not on the mass affluent, worried about their million pound pots.
The Government would be better playing a straight bat and saying that the reforms are about making pension saving more attractive to everyone, but especially to those who are paying penal taxation because of their work for organizations as the NHS. For senior doctors, these are the right policies and we do need to manage the skills welfare in the NHS. Coupling the specific problem of the NHS with the general problem with pension saving would be a more transparent and better received approach.
Wrong time?
We are in the middle of a cost of living crisis in which many are struggling to stay in pension schemes , pay the rent and feed the family.
But is there ever a right time to fix acute problems? Again, the back to work problem is the wrong problem for these reforms to be targeting, the NHS is the acute problem, pension adequacy and fairness are longer term issues.
Sadly pensions “predictability” is not improved if reforms that are introduced at lunchtime are threatened with being over turned by tea. That’s bad timing for everyone!
Wrong people?
We have a regressive pension taxation system as it is. Tax relief goes largely to those who pay tax at higher marginal rates and removing the LTA and tinkering with the AA and MPAA don’t play well with the idea of “levelling up”, those on low pensions.
As a beneficiary of the changes to the LTA , I am loathe to give back the hope of lower future taxation but I am not sure that I cannot deal with a little taxation at 55% on the top slice of my retirement income.
This is a middle class giveaway as the Conservative backbenchers gratefully call it. It cements loyalty from within and makes it poses another problem for Labour who are unlikely to be seen as “anti-aspirational”.
Labour would be well to handle this with caution as any changes to pension taxation have a great deal of emotion attached to them!
The fiscal drag weapon has been used to gather more tax. The drop of the Additional rate (45%) from £150,000 to £125,140 will increase the number of tax payers in this band by 50%
It will help my business of relocating people to Portugal so there is always a silver lining if you look hard enough.
On pensions if you have any of the protections don’t add more contributions and destroy Primary, enhanced, fixed or individual protection until you see the Finance Act and understand the detail
The main thrust of the pension reforms are aimed at NHS Consultants. It would seem that Labour politicians are suggesting that they will reverse pension changes announced in the Spring Budget 2023. If Labour are serious about looking after the health of the nation we need to rethink pension rules that basically punish them from working. Sadly, few politicians understand the impact of pension rules.
An alternative would perhaps be to have a simplistic approach, DB members like those in the NHS are exempt from all lifetime allowance or annual allowance charges, but whilst this may help medics, it would also help those in old DB schemes on high, very high incomes, precisely the sort of people that Labour seem to loathe along with their multinational employers.
Reality is always an irritation for an MP or political party of any persuasion. A few non-partisan facts. The last timer Labour won an election was in 2005. David Cameron formed a Coalition Government following the election in May 2010 (tax year 2010/11).
1. Those earning £200,000 or more as threshold income may well suffer a reduced annual allowance with a tapered annual allowance and will need to do some sums.
2. Those earning £260,000 or more will have a reduced annual allowance and will need to do some sums.
3. Those earning £360,000 or more can only contribute £10,000 gross into pensions, which is less than every basic rate taxpayer.
4. The tax-free cash from a pension is capped at 25% of today’s lifetime allowance at £268,275 which is now to be frozen. That means those retiring in the future have an allowance that does not keep pace with inflation, meaning in real-terms lower tax-free cash sums will be available. Tax free cash of 25% of £1.8m or Primary/Enhanced protection, was higher under the last Labour Government than at any point since.
5. The last Labour Government had an annual allowance of £255,000, there was no Tapered or reduced Annual Allowance.
6. The main gripe of Labour and austerity about salary wage inflation would appear not to apply to pension benefits of the above being-inflation repaired since 2010, in short, the LTA would be £1.8m+ inflation, the Annual Allowance would be £255,000+inflation. Tax free cash from pensions would be higher at a minimum of £450,000+ inflation. Additionally, the £100,000 income threshold for loss of the personal allowance has reduced in real terms.
7. A-Day was introduced by Labour and will turn adult (18) on 6/4/2023. Perhaps adults should be allowed to save for their own financial independence rather than penalised/restricted on both what you can pay in and what you can take out. The original intention of pension simplification and A-Day was to increase the Lifetime Allowance.
8. From 6/4/2023 the 45% rate of tax starts earlier at £125,140, more people are paying additional rate tax.
9. The personal allowance is currently £12,570 and removed from those earning over £100,000 in tax year 2009/10 it was £6,475, the rule to gradually remove the personal allowance for those earning £100,000+ came into effect in 2010/11 set by Labour, in the likely event of a change of Government.
10. According to the Bank of England’s own inflation calculator £100 in 2010 would be £141.10. If this were applied the following might be observed.
• The £6475 personal allowance would be lower at £9,155.82
• £100,000 income before loss of personal allowance would be £141,402
• The Lifetime allowance of £1.8m would be £2,545,248
• 25% tax free cash would be £636,312
• The annual allowance of £255,000 would be £360,576
• In Labours last tax year, the basic rate of income tax (20%) applied to £37,400 this would now be £52,885, the higher rate extended up to £150,000, which would otherwise be £212,104.
Chancellors or all persuasions have a knack are implying positive changes are their own doing all whilst completely ignoring the impact of inflation. You think you have been paying more tax? You have.
(no I don’t vote Conservative).