Election 2024: Pension Lifetime Allowance

by Richard Wadsworth, Director, Glasgow

In the 2023 Spring Budget the Chancellor made a surprise announcement that the Pension Lifetime Allowance (‘LTA’) would effectively be removed from April 2023. The LTA was the limit on the size of pension savings that an individual could build up without incurring, ultimately, an additional tax charge.

Party time!

The removal of the LTA wasn’t quite as generous as the initial headlines suggested – the devil is always in the detail of course - with other restrictions and rules put in place instead, but nevertheless it has allowed many pension investors to continue funding pension contributions, or restart pension contributions, and benefit from a number of tax advantages.

The black cloud

The wind was taken out of pension investors sails to some extent when, the day after the Budget, Shadow Chancellor Rachel Reeves stated “Labour will reverse the changes to tax-free pension allowances. It is the wrong priority, at the wrong time, for the wrong people”.

Understandably, this made individuals a little more cautious about topping up their pensions in fear that, if Labour were to come into power and reinstate the LTA, pension investors might be worse off having made additional pension contributions following the March 2023 Budget announcement.

Carbon’s approach

Our view has developed over time and follows the general principles that run through our business, namely not to try to predict the future or second guess what is coming down the track:

• We encourage clients to use the current legislation to its maximum and take advantage of the tax benefits pensions provide.
• We accept that Labour, if they came into power, would likely change the pension rules again but to disadvantage individuals who made further pension contributions, based on pension rules at the time, would go against the accepted approach of avoiding retrospective taxation. There are plenty of examples within the pension rules in the recent past when rules have changed and individuals could opt for various protections to shield them from retrospective taxation.
• Re-establishing the LTA would not be easy, it would take time and likely come with transitional protection to alleviate the above retrospective taxation point. A question was raised as to whether it would be a priority if Labour got into power but speculating on the list or priority of this list is almost impossible to do given the election hasn’t even happened yet.

And many individuals have made pension contributions in good faith, making use of the current rules whilst noting the risks of future legislative changes but this is no different to any time in the history of pensions. Any form of tax allowance is subject to future change and the only controllable element is the current legislation.

Oh no they’re not…

Then, earlier this month, The FT commented that “Labour has abandoned plans to bring back the pensions lifetime allowance”, adding that “a Labour source said Reeves did not want to add to the uncertainty”.

Where does that leave pension investors?

Carbon’s view is not to try to predict the future, and that includes election results and changes in legislation. Taking action based on what might happen could lead to a significantly worse outcome than accepting any changes that transpire and adjusting course based on hard facts.

Pension rules are very political and will change over time, whatever flavour of government we have, but when and what those rules might look like we don’t know.

So, while everyone’s situation is different, and individual circumstances must always be taken into account, our view continues to be to take advantage of the current pension rules, but keep your affairs under review. Remember that pensions attract up to 48% income tax relief, they grow more-or-less free of tax, a proportion can usually be taken as a tax-free amount at retirement, and any remaining fund on death should not form part of your estate for inheritance tax purposes – those are some pretty compelling attractions.