What Labour’s ‘U-turn on lifetime allowance’ means for your pension

lifetime allowance Retirement saving and pension planning
The lifetime allowance was the limit someone could build up in their pension without attracting a tax charge (BrianAJackson via Getty Images)

After months of speculation, it looks like the lifetime allowance saga has finally run its course, with reports over the weekend saying Labour is set to drop plans to reintroduce the policy.

The lifetime allowance was the limit someone could build up in their pension without attracting a tax charge. Before it was abolished it sat at £1,073,100 for the majority of people and was widely criticised as an unnecessary complication to people’s retirement planning given there was already an annual allowance limit on contributions in place.

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The Conservative decision to ditch the lifetime allowance in the 2023 budget was praised for bringing some much-needed simplicity to pensions.

However, no sooner had chancellor Jeremy Hunt sat down after giving his speech then Labour announced they would reintroduce it should they win the general election.

The reason given was that the removal would be to the benefit of higher earners at a time when many people were battling against the cost-of-living crisis.

lifetime allowance Chancellor of the Exchequer Jeremy Hunt presents the Spring Budget with the iconic 'Red Box' Outside 11 Downing Street.
Chancellor Jeremy Hunt ditched the lifetime allowance in the 2023 budget. (Thomas Krych)

It's a stance Labour maintained steadfastly for more than a year, though details on how it planned to do so were thin on the ground. Rumours swirled that there could be a special carve out for NHS doctors or that the allowance would be introduced at a higher level.

This left people in limbo as to their retirement planning. Do they take advantage of all their allowances now to boost their SIPPs and pensions and risk falling foul of the lifetime allowance in future or should they take a wait and see approach?

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The news that the lifetime allowance is being consigned to the policy dustbin will be greeted with a sigh of relief by people who can now plan for their futures with more certainty.

The lifetime allowance affects more than just ultra-high net worth people. It could be an issue for many who have saved diligently for their future. They can now save with more confidence and make full use of the allowances available to them to boost contributions to their SIPP.

Any reform of the pension tax system should be done with the aim that people are properly incentivised to save for their futures without having to worry about being tripped up by complex rules. Pensions planning is a long-term business, creating consensus around the rules is essential.

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