Yahoo News Your pension still isn’t safe from Labour
For the first time we have seen just how readily Labour will drop ideology for practicality, now that it is the unofficial government in waiting.
Common sense has triumphed and the party has decided to quietly shelve its unworkable plan to reintroduce the lifetime allowance.
In a vacuum of any detailed policy it had always seemed strange that Rachel Reeves, the would-be chancellor, was so quick to say she would definitely reintroduce a cap on pension savings. It was a knee-jerk reaction to Jeremy Hunt’s shock 2023 Budget announcement, where Labour presumed the Tories were just giving a big tax break to their high earning core voters.
While this is a welcome change of direction (and one that could cost the future government as much as £800m) I am not sure savers can jump for joy just yet.
Whichever party wins, the consensus from economists is that there will be tax rises. Given that both main parties have ruled out raising the three big money spinners – income tax, National Insurance and VAT – it means a bit of creative accounting will be needed.
The bad news is there are plenty of ways Labour could pick the pockets of the pension system without breaking a manifesto pledge.
But back to the lifetime allowance. Reeves’ reasoning not to reapply the handcuffs to our savings will no doubt be driven, as it was by the Tories, to keep experienced public servants working. Not only were NHS consultants retiring early and turning down extra shifts as a result of enormous tax bills arriving out of the blue, but senior teachers were downing tools, too.
“No-one should be pushed out of the workforce for tax reasons”, Mr Hunt said, before scrapping the £1.073m limit.
The allowance was always a terrible policy. Firstly, the way it worked meant it favoured people with defined benefit pensions, rather than the vast majority of private sector workers and their defined contribution plans.
Secondly, the cap applied to the total value of your pot, including any investment gain, which allowed the state to steal hard-won returns it had absolutely no right to.
The time for poetry – if Starmer’s campaigning style can be called as much – is nearly at an end for Labour, and now is the time for prose.
So how will it raise the cash needed?
Necessity has stopped it limiting pension allowances. We know Reeves favours a flat rate of pension tax relief, but she has likely realised it’s just too complicated to force through, despite the riches it could offer the Treasury.
A growing number of pension experts think Labour could take aim at the generous tax treatment of pensions on death.
Since George Osborne’s “pension freedoms” reforms and abolition of the 55pc pensions “death tax” a decade ago, savers have ploughed money into pensions as a smart way to avoid inheritance tax. Bringing unspent pension cash into an estate for IHT purposes would bring in serious amounts of extra money.
More simply, Labour could continue the Tories’ old trick of freezing various allowances. When Hunt scrapped the lifetime allowance the fly in the ointment was freezing the tax-free lump sum at £268,275, a quarter of the old cap. There are no plans for this figure to rise with inflation, so over time more of our pensions will be caught out.
Expect more accounting tricks over the next five years of Labour rule.
