Ever since the chancellor announced plans to abolish the lifetime allowance in last year’s Spring Budget there have been concerns and speculation that this could just be a temporary measure that might be undone by a future government.
Following the Budget, the Labour party immediately said they opposed the removal of the LTA and would reintroduce it should they form a government following a general election. Even though the talk around this ‘pledge’ has gone quiet recently, the uncertainty remains.
But how feasible would bringing back the LTA be? The plans for its removal are in now motion, with well over 100 pages of draft legislation published. These painstakingly remove all references to the LTA and replace them with a new regime that only limits tax-free lump sums taken from pension schemes.
Bringing back the LTA after the new legislation is passed would not be a simple job.
The same process would have to be done in reverse, removing line by line each of the new rules, then drafting a completely new set to recreate a lifetime limit on all withdrawals from pensions.
This process would take considerable time and resources of any new government – time you could argue that might be better spent on other policy objectives.
There would also be practical complexities. The current rules remove the LTA tax charge, meaning that pension savers can contribute today without an upper limit on their funds. What would happen to these individuals should the LTA come back?
It would be seen as unfair to retrospectively penalise those who follow the current rules in good faith. One solution would be to introduce a new form of protection to ringfence funds built up over this period, which would be consistent with when the LTA was originally introduced and at each time the level was reduced over the years.
But adding a further protection regime to the seven or so that already exist would add more complexity to a pension tax system that is already difficult for many to understand.
Having this uncertainty is also unhelpful for individuals making decisions regarding their pensions.
The prospect of the LTA removal being temporary may prompt some individuals with substantial funds to crystallise their pensions now rather than risking uncertainty about future developments.
However, making such significant one-time decisions, or providing advice based solely on speculation about future changes, may not always lead to the best consumer outcomes.
There have long been calls to remove politics from pension policy by establishing an independent pension commission capable of making long-term decisions. This could stop the constant rule tinkering every few years and provide stability and consistency for retirement planning.
The debate surrounding the potential reintroduction of the LTA underscores the complexities and uncertainties inherent in pension planning.
While the removal of the LTA by the current government has raised questions about its permanence, the practical challenges of reinstating it would be significant.
