Reinstating the lifetime allowance (LTA) would be “far from straightforward", LCP has said, warning that the Labour party may need to take steps to make sure that large numbers of people do not rush to tap into their pensions to avoid tax charges.

Labour previously said it would reinstate the pensions LTA, if elected, shortly after Chancellor, Jeremy Hunt, announced plans to abolish the LTA as part of his Spring Budget.

However, LCP argued that there is “no doubt” that reintroducing the LTA would be far from straightforward and would require difficult judgments.

In addition to this, it argued that implementation in time for the first financial year after a General Election might be exceptionally difficult, which could increase the need for interim legislation to avoid large scale post-election pension withdrawals purely designed to avoid LTA charges.

The firm warned that this could result in a large number of those with large defined benefit (DB) pensions retiring early, particularly NHS doctors, while those with higher incomes and unused annual allowances from previous years might choose to ‘pile’ money into their defined contribution (DC) savings and then crystallise them before the LTA was reintroduced.

LCP's analysis suggested that this is not just an issue for the top 1 per cent either, as its research showed that 4-6 per cent of those in the run up to retirement with pension savings are potentially affected, perhaps around a quarter of a million people.

Given this, LCP suggested that the government would need to consider whether transitional protection is needed for those who have, in good faith, taken advantage of the LTA changes from April 2023, to build up their pension savings beyond this level but could now face a tax charge if the LTA was reintroduced before they accessed their savings.

More generally, it also queried whether everyone would start under a re-introduced LTA regime with the ‘LTA used up clock’ re-set to zero, or whether the government would look to estimate how much of the LTA people might previously have used up.

LCP partner, Steve Webb, stated: “Whilst reinstating the LTA may be attractive from the perspective of political messaging, the practicalities and risks associated with doing so would appear to be daunting. It is not as simple as just pasting back into legislation every line which has been taken out.

“As soon as the result of the election is known – and even in the run-up to the Election - there could be a flurry of activity as people seek to make the most of their pension savings before a lifetime limit on tax relief is reintroduced.

“As it would be challenging for a new government to implement this policy by April 2025, emergency legislation might be needed to avoid a haemorrhaging of tax revenue as people rush to draw their pensions.

“A new government would also need to be very clear to senior doctors that they need not be concerned that by carrying on working they risk incurring large tax charges. Without this, the new government’s plans to improve the NHS could be undermined by an early exodus of senior doctors.

“Although this issue has been talked about as one which affects only ‘the top 1 per cent’, in practice hundreds of thousands of people who are within a decade of retirement will be taking a very close interest in what any prospective new government says about its plans for the LTA.”

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