The Lifetime Allowance (LTA) in the UK is set to be abolished from April 6th 2024. The Finance Bill is currently with the House of Lords but hasn’t yet received Royal Assent. The policy change was first announced in March 2023. Rachel Reeves, the labour shadow chancellor criticised the policy shortly after the Spring Budget and said Labour would reinstate it. Rachel Reeves statement panicked people, and some have taken unnecessary drastic action.

My personal view is that the lifetime allowance will not be reinstated. I’ve written this article outlining my rationale, but a future government may implement further legislative changes or reverse changes in some way. So, if you have worries about this issue, then read on.

Reinstatement under Labour

I’ve spoken to a few clients recently who had considered acting before Labour get back into office. They wanted to take advantage of the abolished LTA now, to hopefully avoid getting caught out if it were reinstated.

To state the obvious, Labour needs to win the election first. This seems likely, but it’s not a foregone conclusion. Then Labour needs to choose to reinstate the LTA, much more complicated than just saying it pre-election. It may seem like a vote winner now, but the actual reinstatement would be far more complicated.

The difficulty with carve outs

Doctors were put front and centre of the initial push to abolish the LTA.[i] Senior doctors were retiring to avoid accruing further benefits and being made worse off by the LTA. If abolishing the LTA keeps more doctors in the NHS it will be seen as a significant coup. To defend its position Labour promised that they would create a carve-out for doctors when they reinstate the LTA.

However, other senior public sector employees have benefitted from the LTA being abolished. Warnings about experienced head teachers being forced to retire has now pushed Labour into promised a carve out for “other public sector leaders”. [ii] This would be a nightmare to define, and politically fraught.

It could be a slippery-slope, will all public sector employees’ benefit, what about private sector employees who work in mission-driven organisations, or those who have built their pension in one career and moved to the next. I know of at least one ex-doctor who is a financial adviser, would their LTA be protected?

It doesn’t do that much anyway

The lifetime allowance also didn’t raise that much money. In 2020/21 the LTA tax take was only £382 million. I know that sounds like a lot of money, but total HMRC receipts that year was £584 billion.[iii] So, the LTA is worth 0.07% of the UK’s tax revenue.[iv] Looking outside the financial planning world, other taxes in this revenue bracket are the Aggregates Levy (£359 million) and Soft Drinks Industry Levy (£299 million).

If we compare this to the other hot topic in financial planning, Inheritance Tax (IHT), the difference is drastic. IHT raised £5.76 billion in 2020/21, that’s a 15x multiple as compared to the LTA. The LTA does very little for the UK tax take.

Pension providers and the logistics of reinstatement

Further, pension providers face an uphill battle to update their IT systems before the LTA is abolished. Having completed this work, it would be doubly costly to then have to reinstate the old system. Abolishing the LTA simplifies a small aspect of the UK’s convoluted pension system.

Further, if they did announce legislation after getting into power it would cause a flurry of rushed pension access by people seeking to avoid LTA charges. This would reduce the amount of tax a reinstated LTA would bring in. That could push them into a position of emergency legislation, which would be very messy.

Summary

Given the political difficulties involved, the relatively meagre tax take, and the difficulties of reinstatement, my view is that the LTA is soon set to be a historical quirk of the UK’s complicated pension and tax regime.

* Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

* A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

[i] Doctors and the LTA
[ii] Carve out for various public sector workers
[iii] HMRC tax receipts 2020/21
[iv] LTA Tax Take Figure