Labour has reversed its plan to reintroduce the pension lifetime allowance, sparking claims from the Tories of a significant financial “black hole” in Labour’s budget.
The U-turn, valued at £800 million, sees Rachel Reeves, the shadow chancellor, abandoning the pledge to reinstate the lifetime cap on tax-free pension savings.
Labour asserts that this policy reversal will not impact its spending plans, as the expected revenue was not included in their budget calculations. However, the Conservatives estimate that this decision will add billions to what they claim is a £40 billion deficit in Labour’s financial plans.
The lifetime allowance, which was £1.073 million, was abolished by Chancellor Jeremy Hunt in 2023 to retain experienced NHS staff who were retiring to avoid hefty tax bills. Initially, Reeves promised to reverse this, labelling it a “tax cut for the wealthiest.” Despite assurances to protect doctors, the policy prompted concerns of an NHS staff exodus.
The Office for Budget Responsibility noted that abolishing the cap amounted to an annual tax cut of £800 million. However, Labour has now scrapped its plan to reintroduce the cap to avoid further confusion over what they describe as the Conservatives’ “botched” policy, which has left many investors uncertain due to legislative errors.
A Labour source told the Financial Times: “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.” They added that Reeves would “sort out the mess” and prioritise bringing stability and certainty to the economy.
Laura Trott, the Chief Secretary to the Treasury, argued that this reversal would add another £3.2 billion to Labour’s financial deficit. She accused Labour of planning a “raid” on pensions by not adopting the Conservatives’ “triple lock plus” policy, which protects the state pension from tax.
Trott stated, “Despite this U-turn, which adds another £3.2 billion to their £38.5 billion black hole, Labour have failed to rule out a swathe of pensions taxes and their retirement tax will mean the state pension being subject to income tax for the first time ever.” She further claimed that Labour’s approach would make retirements less secure.
Labour’s decision appears to be an attempt to counter accusations of planning a tax increase, with Sir Keir Starmer having already ruled out rises in income tax, National Insurance, or VAT. The Tories have centred their election campaign on tax policies, claiming Labour 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, insisting that all Labour policies are “fully-costed and fully funded.” Confirming the decision not to reinstate the cap, Bridget Phillipson, the shadow education secretary, emphasised the need for stability, stating on Sky News, “It wouldn’t have been our priority to make that change but the Government have created an awful lot of uncertainty for people who are looking towards retirement so no, we wouldn’t be bringing that back and that is about making sure we have got stability and security for people going into this election.”