Whilst plans to reintroduce the lifetime allowance (LTA) could have "some merit", it would represent a "missed opportunity" to improve and rationalise the system of pensions taxation, according to the Institute for Fiscal Studies.

The Finance Act 2024 previously delivered an amended pensions tax regime, effective from 6 April 2024, in which the LTA on most pension and lump sum benefits was replaced by two new allowances on most lump sum benefits.

However, industry experts warned at the time that this was a "rushed job with errors and omissions coming to light, resulting in HMRC having to now engage in a patch and mend job through regulations that are promised".

And while HMRC had confirmed plans to share further technical changes through a second set of regulations "shortly", news of a summer election has thrown these plans into limbo, with Labour reportedly committed to re-introducing some form of the LTA.

But despite industry concerns, the IFS said that, in the absence of more widespread reform, there is "some merit" in Labour’s proposal to bring back something like the LTA, noting that the current system of pensions taxation is overly generous to high earners who get sizeable employer contributions and accumulate big pension pots.

It also said that there would be advantages to doing this swiftly, with estimates suggesting that reintroducing the charge at its previous level might raise almost £800m a year.

It also suggested that it would be sensible to go beyond a simple reintroduction of the LTA at its previous level, stating that any reinstated LTA should also be less generous for DB pensions than the one that was in place from 2006 to 2022.

However, the IFS said this would represent a missed opportunity to improve and rationalise the system of pensions taxation more broadly, potentially including a more generous annual allowance, a reduction in the cap on the amount that can be taken from a pension pot completely free of income tax and a new cap on the amount of pension wealth that can be bequeathed at death free of inheritance tax.

The IFS also argued that the case for this latter set of reforms is stronger than the case for reimposing the LTA.

This is not the first time the IFS has recommended broader change, having previously said that, rather than having a lifetime limit on the value of pensions, it would be better to have a lifetime limit on contributions to defined-contribution pensions and benefits accrued in defined-benefit (DB) pensions.

IFS deputy director and co-author of the report, Carl Emmerson, said: "Given the current way in which we tax pensions there is a case for reintroducing a LTA.

"But that is mainly because so many other aspects of the system are overly generous to high earners who get sizeable employer contributions and accumulate big pension pots.

"Rather than a simple kneejerk return to the system of two years ago, a new Labour Chancellor would be well advised to implement a comprehensive and lasting reform which could rationalise, simplify and make fairer the current system of pension taxation whilst also raising revenue in the medium term.

"The danger is that a reintroduced lifetime allowance ends up being just another bump in the pensions tax road, and another missed opportunity to rationalise the system with a coherent package of measures."

Whatever route taken, industry experts have stressed the need for clarity on the future of the LTA, with the British Medical Association warning that the current lack of clarity around Labour's plans could risk an “exodus” of the NHS's most senior clinicians.

Evelyn Partners partner, Gary Smith, also argued that “some of the details in the implementation have caused lingering uncertainty and confusion – as has Labour’s undertaking to reinstate it”.

He stated: “Either away, it is important to understand that the LTA has been removed from the statute book and so a future government wishing to reintroduce it could not just switch it back on the day after the election but would have to pass new legislation which would likely take the form of a Finance Bill on the back of a Budget – and Shadow Chancellor Rachel Reeves has ruled out a summer Budget.

“The legislative process takes time and therefore is unlikely that a new LTA could be in place until April 2025.

"Applying a new LTA retrospectively would be highly contentious, open to challenge, and therefore unlikely.

"There is also strong precedent, from the original introduction of the LTA and previous reductions in the threshold, that those impacted would able to take out protection, typically by ceasing further funding.”

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