Deputy Prime Minister Angela Rayner is facing backlash over a leaked plan to reinstate the pensions lifetime allowance (LTA), a move which critics have described as a “punitive” pension raid.
The proposal could potentially raise £800 million annually for the Treasury, according to Office for Budget Responsibility assessments.
The leaked memo, sent to Chancellor Rachel Reeves and obtained by The Telegraph, calls for reversing Jeremy Hunt’s 2023 decision to scrap the LTA. Costing such a reform is difficult, but given that the OBR’s assessment was that abolishing the allowance cost £800 million a year, reversing it might be expected to raise almost as much.
Before it was abolished, the LTA limited how much an individual could save into their pension without facing punitive tax charges: 55 per cent if taken as a lump sum, or 25 per cent if drawn as income. The cap was set at £1,073,100 and applied across all pension schemes.
Rayner’s plan would bring those limits back. But pension industry leaders warn that when combined with new rules due in 2027, which will make pension pots subject to inheritance tax, savers could face hefty tax charges for exceeding the LTA, and again when passing on pension wealth to their families.
The memo also mentions a softer option: reintroducing the cap at £1.8 million, the threshold used under the last Labour Government. However, this would bring in less revenue.
The leaked memo was sent to Chancellor Rachel Reeves and obtained by The Telegraph
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Hunt’s decison to scrap the allowance was to encourage people, particularly NHS consultants and GPs, to stay in work longer without facing tax penalties on their pension savings. The policy aimed to prevent early retirements and ease NHS staffing pressures.
Labour initially opposed the move, with Reeves vowing to reinstate the cap before backing down ahead of her first Budget. Medical professionals had warned they would quit on an “unprecedented scale” if the LTA returned, prompting Reeves to shelve the plan.
Instead, Reeves announced that retirement savings would become subject to inheritance tax from 2027, a move described as a “brutal blow” to high savers and wealthy pensioners.
Now, Rayner’s proposal to bring back the LTA has reignited fears of hefty tax charges while saving and again when passing wealth to their families.
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Now, Rayner’s proposal to bring back the LTA has reignited fears of hefty tax charges while saving and again when passing wealth to their families.
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Financial experts have warned GBNews about the potential consequences of reinstating the LTA.
Jason Hollands, Managing Director at Evelyn Partners, described the proposals in Rayner’s memo as “a tax-hikers’ wish list rather than a coherent plan”.
“Reinstating the pensions Lifetime Allowance in its previous form would be a deeply regressive move, undermining confidence in pensions and substantially impacting the public sector where generous, taxpayer-funded gold-plated defined benefit pensions still exist,” Hollands said.
He warned the move would particularly affect the NHS, “hitting doctors and consultants hard, and resurrecting the problem of medical professionals refusing to take on extra work or retiring early because of the tax charges”.
“That could throw into chaos the Government’s plans to reduce NHS waiting lists,” he added, suggesting any special treatment for public sector workers would be “tantamount to throwing a match on a tinder box for private sector workers”.
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Laith Khalaf, head of investment analysis at AJ Bell, also criticised the potential policy change, calling it a “massively retrograde step” that would “create confusion, hesitation and complexity for pension savers”.
“Seeing as we already have controls on how much you can pay into a pension each year, the allowance is effectively a tax on how well you invest your pension and how much risk you take,” Khalaf explained.
He highlighted that reintroducing the limit would cause significant problems for public sector pension schemes, particularly the NHS, where “higher earners would find themselves facing hefty tax charges”.
Khalaf added that any protections for people who had made pension contributions between the abolition and potential reintroduction would be “fiendishly complicated”, warning that “complexity and distrust are already barriers which prevent people saving into a pension”.
