In his March Budget, chancellor Jeremy Hunt unexpectedly announced that the LTA would be abolished by April 2024, with the penal aspect of the LTA tax charge removed for 2023-24 as an interim measure.

The Society of Pension Professionals has published a short paper that examines the features of the Lifetime allowance (LTA) and discusses the potential consequences of retaining it, abolishing it (as the Government intends and with draft Finance Bill clauses issued for consultation in July 2023)  and reinstating it after abolition.

In relation to its potential reinstatement (as promised by Rachel Reeves, Labour’s Shadow Chancellor), the paper points to recent survey findings suggesting that pension savers and advisers expect the LTA to be reintroduced in some form at some point in the future.

LCP’s Steve Webb comments

Given the substantial poll lead being enjoyed by the Labour Party it is no surprise that many expect the LTA to make a return, but assuming that the Government achieves its abolition aim in next year’s Finance Bill, it is not clear how such a reversal will be achieved by an incoming Labour Government.

In earlier speeches, Steve Webb had argued that the LTA is a relatively insignificant pension tax.

but this view appears to be changing. Writing in the FT , Webb states

New analysis from consultancy LCP suggests around 250,000 people in the 55-64 age group could have an LTA issue if it were to be reinstated after the next general election at its previous level. This includes those who already have pension saving above the current LTA of £1,073,100 or who might expect to exceed that level before they retire.

The LTA is a matter of personal importance to the people who take the financial decisions on our occupational pensions which form a cornerstone of a pension consultancy’s work.

Clearly this has not been lost on LCP who have gone so far as to produce a 25 page paper on the matter (published November 4th)

The paper discusses the legislative timetable that would need to minimise the window of  opportunity for high pensions worth individuals to crystallise their benefits before new legislation arrives.  It concludes that a  new Labour Government, committed to reinstating the LTA would have to start preparing the groundwork for the repeal in the next twelve months and might have to use “forestalling” measures to warn people off taking their pension/pot  and running.

LCP reckon that the group most likely to be affected by changes in LTA legislation are in the 55-64 age group

This analysis suggests that the problem is fairly evenly spread between those who have only known DB (presumably careerist in the public sector) , those with purely DC benefits (wealth-savers and those with well funded DC workplace schemes) and those whose careers earned them DB in the past and DC since closure).

The analysis suggests that 230,000 of these “boomers” are at over the LTA today and 120,000 or more are flirting with it. That represents a higher proportion of the mass affluent than might have been thought of in the previous analysis (see opening picture)

What happens next?

We may well hear more about the timetable this month , when the King’s Speech and Chancellor’s autumn statement lay out the legislative timetable. It is sad that the issue of the LTA so dominates the pension landscape that other much more fundamental issues, such as risk- sharing , pot and scheme consolidation and the facilitation of long-term assets as a pension asset class, are overshadowed by  what is , in practice, a perk for the affluent.

But that is the politics of pensions.

Within hours of the March Budget, the Labour party indicated it would, if elected, reverse the policy. Rachel Reeves has made very few such policy statements and this one may well hang around her head like an albatross.

LCP conclude

Whilst challenging, the Labour Party might find that publishing detailed plans (or confirming that the LTA will not be reintroduced) ahead of the election could reduce the
number of people retiring early and so both boost economic activity and tax revenues.

The paper suggests to me that reinstating the LTA on its own would be a massive disruption, more than I (or I suspect Steve Webb) had previously appreciated.

I don’t expect that Labour will want to reverse the LTA in isolation but use it as the trigger to look again at pensions taxation in the round. The LTA is an unexploded bomb that the Labour party need to defuse if it is not to risk blowing up their carefully laid plans.