As many as two million pensions could be under threat from a future Labour tax raid, new analysis has shown.
The lifetime cap on pension savings will be abolished from April 2024, under Conservative reforms designed to encourage more over-50s to return to the workforce. The overhaul was announced in the Budget on Wednesday. It means savers can contribute to their pension – and benefit from government tax relief – without incurring a penalty.
However Labour has immediately pledged to reverse the reforms, saying that they only benefited the “top 1pc” of workers.
Rachel Reeves, the shadow chancellor, said: “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.”
Labour currently has a 22-point lead over the Conservatives, according to a YouGov poll published this week. The next general election must be held by January 2025, meaning the lifetime allowance could be removed for just nine months.
Reinstatement of the cap at £1.073m under Labour could hit around as many as two million non-retired people, according to new estimates from the consultancy LCP.
Sir Steve Webb, a former pensions minister and now partner at LCP, said that the threat of a Labour government could spark a “stampede” of people saving into their pensions today and retiring before Labour overhauls savings rules.
“People will max out the size of their pot and then, if they think a Labour government is imminent, will ‘cash out’, just before the election and take their pensions,” he said.
The uncertainty has thrown the financial industry into chaos, with financial advisers saying they have been inundated with calls from savers already looking for ways to protect their nest eggs from the risk of a Labour government.
David Penney, a financial planner based in London, said: “Labour have created a situation now where people have to pre-empt government policy when planning for their pensions. It has caused massive levels of uncertainty.”
David Hearne, another financial planner, based in Berkshire, said that the Labour stance was ill planned. “The tragic thing is that whatever the changes are, it creates uncertainty and apathy around pensions and most people will not bother with them.”
Mr Hearne noted that if Labour were to reinstate the lifetime allowance, then precedent would suggest they would also have to introduce some protections for savers who have already passed the cap. In the past when the lifetime allowance has fallen, the government allowed some savers to maintain the old, higher allowance.
Nigel Peaple, of the Pension and Lifetime Savings Association, a trade body, said that the divide in Government ran counter to the need for “simplicity and stability” in retirement planning. Labour has been approached for comment.
Q&A: How to beat Labour’s future pension raid
The Conservative reforms announced in the Budget followed a long campaign from NHS doctors, for whom pension tax rules have been a major obstacle.
Unlike private sector workers, they are unable to control how much money goes into their pension because they are members of a generous “defined benefit” scheme. For many, the only way to avoid large, unexpected tax bills has been to reduce their working hours or retire early.
However, Labour has said it would reverse the changes if it wins the next election. How should savers prepare for a change of government? Telegraph Money answers your questions.
How can I make the most out of the reforms?
Under current rules, any savings that breach the lifetime allowance of £1.073m are taxed at 55pc if the money is taken as a lump sum, or 25pc, on top of income tax, if taken out gradually. Any pension savings in excess of the allowance not used by the age of 75 are taxed at 25pc.
While experts have warned that it is unlikely that Labour would impose a retrospective tax on savers who benefit from the removal of pension caps, the next 12 months could prove crucial in maxing out on allowances.
Rebecca O’Connor, of the provider PensionBee, noted that under Mr Hunt’s reforms, the annual allowance – which caps how much you can save tax-free into a pension each year – is set to rise from £40,000 to £60,000 in April.
“Carry forward rules, which enable people to use up unused annual allowance from the previous three tax years, are in place, so not only could you make contributions, including tax relief and any employer contributions, and up to £60,000 for the tax year 2023-24, you could also look to use up unused annual allowance from earlier years,” she said.
What are the risks?
Hundreds of thousands of workers may be tempted to max out on contributions while the lifetime allowance has been lifted, and then retire just before the general election. However, Mr Hearne noted that any reversal of the reforms may take much longer to come into force.
“It will take time to change legislation, let alone help pension providers prepare for such a significant change,” he said. “I would urge people not to act quickly on what at the moment is still speculation.”
Should I borrow money to pay into my pension?
Rachael Griffin, of the wealth manger Quilter, cautioned that while pensions were an attractive way of investing, in most cases it would not be wise to borrow money to contribute more.
“Pension investments are subject to market risks, and returns are not guaranteed. Taking on debt to fund a pension could lead to financial strain if investments underperform, as the individual remains responsible for repaying the borrowed funds,” she said.
“More often than not, the costs of obtaining a loan are higher than the expected returns and tax savings from pension contributions, resulting in a net loss. Repaying a loan requires sufficient cash flow, which can be challenging if pension savings are locked away until retirement.”
Ms Griffin warned that some pension providers and regulators may impose restrictions on using borrowed funds for pension contributions.
How else can I beat the tax raid?
However, Mr Hearne noted that in some cases it may work in savers’ advantage to prioritise investing into their pension rather than paying off low-interest debts.
“For example, if you are under the age of 55 and on a low fixed rate mortgage, then it may be better to use spare cash to make additional pension contributions,” he said. “Your cash will get tax relief, then you can take your cash free lump sum and clear your loan afterwards.”
