Major think tank backs Labour's pension tax plans

The Institute for Fiscal Studies (IFS) has come out in support of Labour’s plan to reinstate the lifetime allowance (LTA), arguing that the amount people can save into their pension tax-free should be capped.

The respected think tank said the current system is overly generous to wealthy savers and called for a wider series of changes. However, it acknowledged that neither political party would overhaul the system so a cap would be a basic requirement. “In the absence of an appetite for comprehensive reform, there is a case for restricting the amount of tax-relieved pension saving that an individual can do”, IFS economists said.

The LTA capped the amount people could hold in their pensions tax-free at £1,073,100. Chancellor Jeremy Hunt abolished it in 2023 as part of a bid to discourage older workers, particularly NHS doctors, from retiring. At the time, Labour pledged to reinstate the LTA if it came to government, with shadow chancellor Rachel Reeves deeming its abolition “the wrong priority, at the wrong time, for the wrong people”.

However, experts have pointed out that bringing back the LTA wouldn’t be straightforward for Labour due to the technical complexities involved. The abolition of the LTA became law last April, but the relevant regulations are still being ironed out after encountering a series of issues and delays.

Since the 4 July general election was called, Labour has yet to confirm whether it still intends to go ahead with its plan to bring the LTA back, with more information likely to be in its manifesto when it is published. Any reintroduction of the LTA is unlikely to be retrospective. Jon Greer, head of retirement policy at Quilter, said that this would go “against a key principle of the tax system, which is that you have to have certainty at the time you make decisions.”

The IFS also recognised that bringing back the LTA would present some issues, including how to deal with people who have made big contributions to their pensions since the threshold was abolished.

A new system of protections would likely have to be put in place. The IFS also proposed that the LTA should be brought back at a higher value with limits on the 25 per cent tax-free lump sum and on the amount of pension that can be passed on to beneficiaries free of inheritance tax.