The tax is known as the pensions lifetime allowance, or LTA, and I’ve been campaigning for it to be dumped for years. My articles quoted a string of pensions experts who have called it “horrific”, “punitive” “a nightmare”, “overly complex” and “impossible to understand”.
At times I got tired about banging on about the lifetime allowance, and I’m sure readers did, too. But I kept doing so because I felt it was important to keep up the pressure.
More than two years ago, in March 2023, it appeared that Tory Chancellor Jeremy Hunt had listened, because he scrapped the tax in his budget.
Almost immediately, Labour pledged to reinstate it, dashing my short-lived hope that I could finally stop writing about the LTA.
Now, according to this morning’s Financial Times, Labour leader Keir Starmer and shadow chancellor Rachel Reeves have finally seen sense.
The FT reports that “Labour abandons plans to bring back lifetime cap on tax-free pensions savings”.
That’s terrific news. I couldn’t be happier.
I don’t believe Labour takes tax policy tips from Express.co.uk comment articles (probably the reverse) but I’m delighted it’s done the right thing here.
While the LTA may seem like a tax break for the wealth, in practice, it’s just a messy, complex, confusing and ultimately unfair.
If Labour wants to squeeze the rich, there are fairer and more sensible ways of doing it. I’ve no doubt that Reeves will be exploring every single one of them.
The pension lifetime allowance caps the maximum that savers can build up across all their company and personal pension schemes during their lifetime.
Anyone whose total pension pot exceeded an arbitrary sum paid an incredible 55 percent tax on the excess to HM Revenue & Customs.
That made it one of the most brutal tax rates of all.
The lifetime allowance stood at a whopping £1.8million a dozen years ago, so only the very rich had to worry about it.
It was repeatedly slashed to just over £1million, which may seem high to most people but a shocking number were set to breach the LTA over the next few years.
The LTA was designed to stop wealthy savers from earning too much tax relief on their pension contributions.
Fair enough.
Pensions tax relief costs the government around £50billion a year, and help should be directed at lower earners.
But in practice the lifetime allowance failed to do what it was designed to do while also triggering an exodus of NHS doctors, who were most likely to get hit by the tax penalty.
Thousands quit the NHS to avoid it while surgeons were reluctant to take on extra work, worsening post-Covid treatment backlogs.
The LTA does not limit how much people can pay into a pension and claim tax relief. The annual allowance does that. Reeves could reduce that which would be a blow but at least would be simple, clear and easy to understand.
The pensions lifetime allowance was a tax on successful investing. A punishment for doing what successive governments have been urging Brits to do for decades.
Worse, nobody knew if they would pay. A stock market spike just before retirement could push savers above the LTA threshold, at which point HMRC filled its boots at their expense.
As the General Election loomed, Labour went strangely quiet on the lifetime allowance. Now we know why. It was having a rethink.
Nothing wrong with that, if you ask me. Not if you come to the right decision as a result.
There was no point tinkering with a bad tax, say, by hiking the lifetime allowance to £2million as some suggested.
It had to go.
And incredibly, it has.
I’d never have come anywhere near hitting the LTA myself, sadly. I just saw it as a bad tax that created yet another layer of pensions complexity and uncertainty.
If the FT is right, the LTA is dead. I don’t need to write about it ever again.
I said that in March 2022, but spoke too soon. Fingers crossed this really is the end.
But with Labour lining up a fiscal onslaught if it wins in July they’ll be plenty more pensions taxes to worry about.