Labor has reversed its plan to reintroduce the lifetime pension benefit, prompting claims from the Tories of a significant financial “black hole” in Labour's budget.
The shake-up, valued at £800 million, sees Rachel Reeves, the shadow chancellor, renege on a pledge to restore the lifetime limit on tax-free pension savings.
Labor claims this policy reversal will not affect spending plans as expected revenues are not included in their budget calculations. However, the Conservatives estimate that this decision will add billions to what they say is a £40 billion shortfall in Labour's financial plans.
The lifetime allowance, which amounted to £1.073 million, was abolished by Chancellor Jeremy Hunt in 2023 to retain experienced NHS staff who retired to avoid high tax bills. Initially, Reeves promised to reverse this, calling it a “tax cut for the richest.” Despite assurances to protect doctors, the policy led to concerns about an exodus of NHS staff.
The Office for Budget Responsibility noted that removing the cap amounted to an annual tax cut of £800 million. However, Labor has now scrapped its plan to reintroduce the cap to avoid further confusion over what they describe as the Conservatives' “failed” policy, which has left many investors unsure due to mistakes in the legislation.
A Labor source told the Financial Times: “The Conservatives have bungled their policy of abolishing the lifetime allowance, leaving thousands of people nearing retirement in limbo because of mistakes in the legislation.” They added that Reeves would “clean up the mess” and prioritize bringing stability and certainty to the economy.
Laura Trott, the principal secretary at the Treasury, argued that the turnaround would add a further £3.2 billion to Labour's financial deficit. She accused Labor of planning a “raid” on pensions by not adopting the Conservatives' “triple lock plus” policy, which protects the state pension from tax.
Trott said: “Despite this turnaround, which adds a further £3.2bn to their £38.5bn black hole, Labor has failed to eliminate a whole raft of pension taxes and their pension tax will mean state pensions will be subject will be subject to income tax for the first time ever.” She further claimed that Labour's approach would make pensions less secure.
Labour's decision appears to be an attempt to refute accusations of planning a tax increase, with Sir Keir Starmer having already ruled out increases to income tax, national insurance or VAT. The Tories have focused their election campaign on tax policy, claiming Labor plans to increase the financial burden on families by £2,000 to cover their spending plans.
Sir Keir Starmer has dismissed these claims as 'deliberate' lies and insisted that all Labor policies are 'fully budgeted and fully funded'. Bridget Phillipson, the shadow education secretary, confirmed the decision not to reintroduce the cap and stressed the need for stability. She said on Sky News: “It wouldn't have been our priority to make that change but the Government has an awful lot of uncertainty for people looking for their pension so no, we're not bringing that back and that's what matters to ensure that we have stability and security for the people participating in these elections.”
