Labour abandons plans to bring back pension lifetime cap in £800m U-turn

Labour has abandoned plans for a tax raid on pensions, prompting claims of a growing “black hole” in the party’s finances.

In a U-turn estimated to be worth £800 million, Rachel Reeves, the shadow chancellor, has dropped a pledge to reinstate the lifetime allowance, which capped the amount people were able to save into their pensions tax free.

Labour has insisted that the cash set to be raised by the policy was not factored into its spending plans, meaning it will not need to find the money elsewhere to deliver on its promises.

But the Tories claimed it would add billions more to Labour’s “black hole”, which it estimated at around £40 billion.

The decision not to bring back the lifetime allowance, as first reported by the Financial Times, is the latest in a string of U-turns from Sir Keir Starmer dating back to his leadership campaign.

The £1.073 million cap on the amount that can be saved into pensions free of tax was abolished by Jeremy Hunt, the Chancellor, in 2023, in an effort to stop experienced NHS staff quitting the workforce to avoid tax bills.

Ms Reeves quickly swore to reverse the move – calling it a “tax cut for the wealthiest in society”. Despite assurances from Labour that doctors would be protected, the pledge prompted fears of an exodus from the NHS.

The Office for Budget Responsibility said scrapping the limit would amount to a tax cut of £800 million per year.

Tories’ ‘botched’ policy

But it is understood Labour’s plans to reverse the change have now been abandoned. A source told the FT this was to avoid exacerbating confusion over the Tories’ “botched” policy, after the paper reported that thousands of investors with big pension pots had been left in limbo because of “errors” in the legislation abolishing the cap.

The source said: “The Conservatives have botched their policy of abolishing the lifetime allowance, with thousands of people approaching retirement being left in limbo because of errors in legislation.”

They said Ms Reeves would “sort out the mess”, adding: “Labour’s priority is to bring stability and certainty back to the economy.”

But Laura Trott, the chief secretary to the Treasury, said the move would add another £3.2 billion to the “black hole” in Labour’s finances.

She claimed the party would still carry out a “raid” on pensions by refusing to adopt the Tories’ “triple lock plus”, which would increase the personal allowance for pensioners at the same rate as the state pension, protecting it from tax.

“Despite this U-turn, which adds another £3.2 billion to their £38.5 billion black hole, Labour have failed to rule out a swathe of pensions taxes and their retirement tax will mean the state pension being subject to income tax for the first time ever,” she said.

“It’s very clear that Labour will raid pensions, just like they did last time, making people’s retirement less secure.”

Labour’s tax raid

It will be seen as an attempt by Labour to ward off claims it is plotting a tax raid in No 10, with Sir Keir already forced to rule out a rise in income tax, national insurance or VAT.

The Tories have put taxes – particularly for pensioners – front and centre of their election campaign, accusing Labour of threatening to raise the burden on families by £2,000 to make up for the “black hole” in its spending plans.

Sir Keir has branded this a “deliberate” lie from Mr Sunak and insisted his policies are all “fully-costed and fully funded”.

Bridget Phillipson, the shadow education secretary, confirmed the decision not to reimpose the cap on Monday morning, citing the need for “stability”.

She told Sky News: “It wouldn’t have been our priority to make that change but the Government have created an awful lot of uncertainty for people who are looking towards retirement so no, we wouldn’t be bringing that back and that is about making sure we have got stability and security for people going into this election.”