Labour said it will reverse Chancellor Jeremy Hunt’s decision to scrap the lifetime allowance on pensions, saying it will only benefit the rich.

Shadow Chancellor Rachel Reeves has called the plan “the wrong priority, at the wrong time, for the wrong people”, resulting in the top one per cent of pension savers getting a massive tax break for their retirement.

The party says Mr Hunt’s decision to scrap the lifetime allowance was announced just minutes before new figures from the Office for Budget Responsibility showed that the real disposable income of average UK households has fallen by £1,500 since the start of the pandemic.

Mr Hunt was expected to raise the allowance from £1.07m to £1.8m to encourage high earners, such as doctors, to stay in work rather than retire. Instead, he decided to scrap the limit and raise the annual tax-free savings limit from £40,000 to £60,000.

But Labour says the decision will mean those with more than £1.4 million in their pension pot are able to pay up to £150,000 less in tax, while basic rate taxpayers face an extra £650 in tax next year, and the country’s overall tax burden is projected upwards yet again.

The lifetime allowance measure alone will cost the taxpayer more than £70,000 for every person forecast to return to the labour market as a result of the policy, says Labour.

Ms Reeves said: “The Budget was a chance for the government to unlock Britain’s promise and potential. But the only surprise was a one billion pound pensions bung for the one per cent, a move that will widen the cost of living chasm.

“At a time when families across the country face rising bills, higher costs and frozen wages, this gilded giveaway is the wrong priority, at the wrong time, for the wrong people.

“That’s why a Labour government will reverse this move. We urge the Chancellor and the Conservative government to think again too.”

Mr Hunt’s move was welcomed by professionals who had lobbied for the change. Dr Vishal Sharma from the British Medical Association, said: “The scrapping of the lifetime allowance will be potentially transformative for the NHS as [the majority of] senior doctors will no longer be forced to retire early and can continue to work within the NHS, providing vital patient care.”

Some however will be concerned that Labour’s pledge to reverse the decision could mean a continuation of flip-flopping on pension rules.

Colin MacPherson of Alan Steel Asset Management said: “Sadly, the last 17 years have shown governments are quite happy to play about with pension rules to suit their needs, but hopefully parties on both sides of the divide will have learnt from this and agree on a need for consistency of rules when it comes to people saving towards one of the biggest financial decision of their lives.”

He noted that the removal of the LTA will not increase the amount of tax free cash that can be taken from a pension which will remain at 25% with a maximum of £268,275 (25% of the existing LTA) or higher for those that have protection. 

“But it does mean that there should no longer be a tax penalty on the growth achieved by your pension fund.”

Jeremy Croysdill, director of wealth planning at Brown Shipley, said: “Scrapping the lifetime allowance may not be the incentive the government hopes. Many wealthier workers may simply enjoy retirement with a bigger pension pot without tax-leakage and access to tax-free cash to pass onto their children.”

Russell Anderson, independent financial adviser with Aberdein Considine said: “The rumours had suggested that the Chancellor may look to raise the Lifetime Allowance for pensions but the decision to remove it completely it was totally unexpected.

“Whether this policy assists Mr Hunt in helping to keep doctors working remains to be seen but it is certainly a boost to those in a position to save larger amounts towards their pension, especially when they will benefit from 40% or 45% tax relief direct from the government.”

Senga Prior of the Association of Taxation Technicians, noted that the revisions contained in the Budget not only increase the annual allowance itself, but also increase the income level at which the annual allowance is tapered from £240,000 to £260,000. The minimum tapered annual allowance is also set to increase from £4,000 to £10,000.

“We are pleased to see the Government taking action to remove what has proved to be a real issue for senior doctors.  However, it should be remembered that the very highest earners could still see a tax charge.

“Alongside encouraging senior staff to remain at work, a further pension reform included in the Chancellor’s Budget proposals aims to reduce a disincentive for people who have already retired from returning to work.

“Where an individual has retired and has already accessed their pension fund, the amount they can then contribute to any pension without incurring a tax charge is capped at £4,000. 

“The proposal to increase this to £10,000, matching the minimum tapered annual allowance, should provide greater freedom for pensioners to return to work and continue contributing to a pension fund.”

Budget reports

Hunt breaking down barriers to growth