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Labour has abandoned plans to bring back the pensions lifetime allowance, in an £800mn U-turn which will be welcomed by wealthier savers including hospital consultants and headteachers.
Rachel Reeves, shadow chancellor, has dropped the proposal from Labour’s election manifesto, to be published on Thursday, because it would add uncertainty for savers and be complex to reintroduce, her allies told the Financial Times.
The move is also a sign of Labour seeking to “de-risk” its election campaign — the party currently leads the Conservatives by about 20 points — by avoiding tax-raising policies that could be attacked by the Tories.
Reeves’s allies said the party had not allocated the £800mn that would have been raised from reintroducing the LTA for any of Labour’s spending plans. “There will [be] no black hole as a result,” said one.
In his Budget last year, chancellor Jeremy Hunt abolished the pensions lifetime allowance, which put a cap on how much people could save, or benefit from investment growth, in their pensions before tax charges kicked in.
The move, which came into effect in April 2023, was welcomed by better off savers, including senior NHS doctors and other public servants, who were most at risk of breaching the old £1.073mn cap.
In 2021-22 some 11,000 people paid an average charge of £40,000 each on pension savings that exceeded the cap. The Office for Budget Responsibility scored the abolition of the cap as an £800mn-a-year tax cut.
At the time, Reeves vowed to reverse the change, saying it was “the wrong priority, at the wrong time, for the wrong people”.
However, she said a Labour government would carve out specific rules for NHS doctors when it brought back the LTA to avoid what unions claimed would be an “exodus” of senior hospital staff.
Up until a few weeks ago, the party had remained committed to the LTA but had not come up with details of how the allowance, a complex piece of tax legislation, could be easily reinstated.
Last month, the FT revealed that thousands of investors with large pension pots had been left in limbo owing to errors in the bill removing the LTA, which were not fixed before the election was called for July 4 by Rishi Sunak.
A Labour source said Reeves did not want to add to the uncertainty. “The Conservatives have botched their policy of abolishing the lifetime allowance, with thousands of people approaching retirement being left in limbo because of errors in legislation.”
The source said Reeves would “sort out the mess”, adding: “Labour’s priority is to bring stability and certainty back to the economy.”
In the absence of a plan to protect doctors from the LTA, the British Medical Association, the doctors union, last month warned that bringing back the LTA risked “an exodus” of senior clinicians who were “critical” to reducing waiting lists, a key Labour pledge.
Dr Vishal Sharma, chair of the BMA’s consultants committee, said: “Since Labour announced its initial plans to reinstate the lifetime allowance, the BMA has been lobbying the shadow team to warn them of the risks to the NHS of doing so.” He added that it was welcome that Labour “has listened to our concerns and has reconsidered these plans”.
Tom Selby, director of public policy with AJ Bell, an investment platform, said Labour “deserved credit” for recognising the complexity of reintroducing the LTA and dropping the plan, giving savers “confidence to plan for the future”.
While wealthier pension savers will welcome the move, there will be more trepidation about whether Reeves would curb other pensions tax breaks if she becomes chancellor, notably the system of pension tax relief.
In 2016 Reeves — a backbench MP at the time but a former shadow work and pensions minister — proposed setting a “flat rate of pension tax relief” at 33 per cent, below the 40 per cent tax rate paid by higher earners.
Reeves’s spokesman said this was “not Labour policy” and that there were “no plans” to curb tax relief for higher earners, while refusing to categorically rule out such a move in the next parliament.