Labour drops plan to reintroduce pension saving cap

Shadow chancellor Rachel Reeves wearing a blue jacket and carrying a black bagImage source, Getty Images

Labour has dropped a plan to reintroduce a cap on how much people are allowed to save into their pensions before paying tax.

Under the pensions lifetime allowance, pension pots over £1.07m faced an annual tax of £40,000 on average.

The cap was scrapped in April but Shadow chancellor Rachel Reeves had vowed to bring it back, saying it could raise £800m a year.

However, her party has now reversed the decision ahead of the release of its manifesto on Thursday, reportedly because the cap would add uncertainty for savers and be complex to reintroduce.

The Lifetime Allowance (LTA) capped the amount people could hold in their pensions tax-free.

Chancellor Jeremy Hunt abolished it in March last year in an attempt to discourage older workers, particularly NHS consultants, from retiring early.

At the time, Labour promised to bring back the cap, suggesting it only benefited wealthy savers.

Ms Reeves had called the decision to scrap it the “the wrong priority, at the wrong time, for the wrong people”.

However, she had promised that a Labour government would make exceptions for NHS doctors and other public servants when the cap returned.

Errors in the legislation

According to the most recent government data from tax returns, there were 11,660 lifetime allowance charges between 2021 and 22, a figure that has consistently increased over the last decade.

Labour's decision not to bring back the cap follows lobbying from senior NHS staff and unions.

Last month, the Financial Times reported that thousands of investors with large pension pots had been left in limbo due to errors in the legislation removing the LTA.

According to reports, Labour did not want to add to this uncertainty.

“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,” a Labour spokesperson said.

The Conservative Party has been approached for comment.