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!