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Panic as Labour lines up 55% pension ‘horror’ tax raid. But there may be a way to avoid it

The punitive levy was only recently scrapped by Chancellor Jeremy Hunt, who acted after years of criticism by financial experts. The relief only lasted a few hours as Labour quickly pledged to restore the tax if they won power.

The tax is called the pensions lifetime allowance (LTA) and slaps a brutal 55 percent tax charge on people who are deemed to have too much pension.

With an election less than six weeks away, savers who could get hit by the restored LTA are desperately considering their options, financial advisers tell me. 

They don’t see why they should hand over more than half their lifetime savings to HM Revenue & Customs when the only thing they have done wrong is save too much for retirement. Isn’t that what the government wants us to do?

Reviving the LTA will be a mighty blow for public sector workers, particularly senior NHS doctors, many of whom took early retirement rather than see their pension ravaged.

That was one of the reasons why Hunt scrapped the charge. Restoring it would cause chaos all over again.

The lifetime allowance (LTA) hits any saver with more than £1,073,100 in their combined company and personal pension pots.

It’s a bizarrely precise number given that it’s a totally arbitrary figure. The LTA used to be £1.8million but was cut in Budget after Budget. If it had climbed with inflation it would be worth £2.25 million today. 

The cap is based not on the amount of money you pay in but how big your pot grows. A sudden stock market surge could tip many into paying it who never thought they would.

Pension experts have labelled the LTA horrifically complex, because nobody knows whether they will get caught from one day to the next, making pension planning impossible.

When Hunt announced he was scrapping the tax in his Budget on March 2023, Labour reacted with “a knee-jerk pledge to reinstate it”, says Jason Hollands, managing director of fund platform Bestinvest by Evelyn Partners.

“This has been a source of uncertainty for people with larger pension pots ever since. It’s come into even more focus with the snap election looming, giving people less time to plan.”

Savers face a stark choice, Hollands says. “They don’t know whether to make further pension contributions while they can or take cash out earlier than they would otherwise like.”

Adding to the uncertainty, we don’t know whether Labour will include a pledge to restore the LTA in its manifesto, or quietly drop it.

Hollands would prefer they dropped it. “The LTA caused chaos in the public sector where generous, final salary pensions still exist, with doctors and surgeons refusing to take on extra work or taking early retirement.”

Nobody wants a return to those days, but unless shadow chancellor Rachel Reeves changes tack, we could be there soon enough.

And if she does reintroduce it, we have no idea how high or low she will set the cap. If she drops it, even those with modest pots could be affected.

Yet Hollands says there is still time for worried savers to do something about it.

If Labour win on July 4, it cannot simply reintroduce the LTA the day after by decree, Hollands says. “As it has been removed from the statute book, it would require new legislation, possiblly in the Autumn Statement.”

Passing the Bill would take time and Reeves may not be able to re-introduce the LTA until April 6, 2025. “This offers a narrow window of opportunity for savers to top up their pensions before the cap returns,” Hollands says.

Reeves is unlikely to make the new lifetime allowance retrospective, he says. When the LTA was first introduced, and every time it was cut, affected savers could apply to HMRC to protect their existing pot. “Such an approach is likely to apply if the LTA is reintroduced”.

Worried savers should talk to a financial adviser to see what they can do about it. Acting on speculation is risky, so you need to consider every option.

Personally, if I was Reeves, I wouldn’t introduce the LTA. It’s a bad and messy tax that only causes problems. If she wants to save money on pensions, there are easier and simpler ways of doing it. Savers will be hoping she sees sense.


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