If Labour’s proposed reinstatement of the lifetime allowance was to go ahead, it would be “sensible” to go beyond just reintroducing it at its previous level, according to the Institute of Fiscal Studies.
In a briefing paper looking at how the pensions lifetime allowance could be reintroduced, the IFS said there should not simply be a return to the system that existed before it was scrapped.
The think tank said to do this would be a missed opportunity at reform.
Carl Emmerson, deputy director of the IFS and co-author of the piece, said given the current way in which pensions are taxed there is a case for reintroducing a lifetime allowance.
This is mainly because many other aspects of the system are overly generous to high earners who get sizeable employer contributions and accumulate big pension pots, he said.
He added: “Rather than a simple knee jerk 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.”
Shadow chancellor Rachel Reeves has pledged that a Labour government would reintroduce the pensions lifetime allowance, which was abolished by chancellor Jeremy Hunt in his March 2023 Budget.
The lifetime allowance was a limit on the total value an individual’s private pensions could reach before tax rates were applied.
When it was abolished the LTA stood at £1,073,000.
How should it be reintroduced?
The IFS set out several options of how it could be brought back.
The first would be to simply reinstate it at its previous level, but this would raise several questions, it stated.
Firstly, how should individuals whose pension wealth is above the reinstated lifetime allowance, perhaps as a result of contributions made following the March 2023 Budget announcement, be treated?
This was an issue when the lifetime allowance was first introduced and when it was lowered and special protections were put in place at the time, which could be done again.
Also what about those who had large uncrystallised pension pots but who have made withdrawals – or turned age 75 – since April 2024 when there was no lifetime allowance in place?
The IFS said an incoming Labour government could simply accept this, and reintroducing the lifetime allowance would raise less revenue as a result.
Alternatively, a way to ease the transitional issues would be to reinstate the lifetime allowance but at a higher level than £1,073,000.
Higher value LTA
One option set out by the IFS was to reinstate the lifetime allowance at a higher value alongside a reduction in the amount of pension from which 25 per cent can be taken tax free.
There should also be a new limit on the amount of pension that can be bequeathed free of inheritance tax.
