Thousands are facing a huge penalty when they retire as the pension protection plan is scrapped
Savers could face a hefty penalty when they retire, as plans to protect thousands of workers from pension taxes have been scrapped.
Labor has reversed plans to protect some public sector workers by reintroducing the lifetime allowance (LTA) if it wins the next general election, The Sun has learned.
The Longevity Allowance (LTA) is the total amount that you can save tax-free for your pension during your lifetime.
The Party had previously said it would provide a ‘carve-out’ for doctors to avoid being hit by pension taxes.
Meanwhile, reports earlier this month suggested that Labor was planning to introduce separate rules for other ‘critical’ public sector workers, including teachers.
The party has committed to reintroducing the LTA if it wins the next election, after the current conservative government announced it would scrap the policy in its spring 2023 budget.
The intention is for the surcharge to be abolished in April this year.
Shortly after the announcement, Labor said it disagreed with the abolition of the allowance and announced it would bring it back as a key pledge.
This proposal has not been very popular, and Labor has since come under enormous pressure from public sector workers most affected by the LTA.
As a result, the country has announced a series of plans on how it wants to prevent policies from affecting them after retirement, such as creating separate allowances for certain public sector professions.
Meanwhile, private sector workers would still be fully subject to the regular LTA.
According to Shadow Treasury insiders, Labor has now abandoned plans to create a separate system between private and public sector pensions or create a ‘carve-out’ for public sector workers.
Instead, ongoing policy work is now focusing on the level at which the LTA should be restored, taking into account the substantial inflation since the level was last set.
It is understood the party is still considering pressure on the public sector as part of this decision, but will seek to retain public sector leaders through a more proportionate solution.
One industry source said these latest plans suggest Labor could instead set the LTA threshold at a higher level than previously set when it was reintroduced.
This would mean that some currently affected employees would no longer be punished as a matter of course.
Experts had previously said that attempting a separate system for public and private sector workers was unworkable and would introduce unfairness into the system, even if it protected crucial workers.
Steve Webb, partner at consultants LCP, said if there is to be a lifetime benefit it should apply equally to everyone.
“It would be both wrong and impractical to try to exempt people who have worked in certain sectors,” the former pensions minister said.
“If the opposition wants to prevent doctors and others from voting with their feet and taking early retirement to be on the safe side, it will have to be clear about its plans well before the elections, so that people can make well-informed choices about retirement savings and retirement.”
What is the lifelong benefit and who is affected by it?
The lifetime allowance was last set at £1,073,100, although this will be abolished entirely from April.
This means that you cannot save more than this amount in your pension without being subject to tax.
The rules generally affect higher earners, who have the opportunity to save more for their pension over their lifetime.
However, certain public sector professions are particularly affected as they typically work high levels of paid overtime due to the pressures on their profession.
The punitive pension tax has led to many doctors retiring earlier than they would otherwise have done to avoid being hit with a huge bill – a situation the NHS cannot afford.
The same problem exists in the teaching profession, where top principals are retiring early because of taxes.
While experts support eliminating inequality between professions and possibly raising the threshold – affecting fewer workers – they say it would be better for Labor to drop plans to reintroduce the LTA altogether.
Tom Selby, director of public policy at pensions company AJ Bell, said: “Abolishing the LTA was a hugely positive step that in one fell swoop removed one of the biggest barriers to senior doctors taking on extra hours, putting pressure on the NHS was illuminated.
“The decision was also a big positive for savers, who will no longer face penalties for doing the right thing and saving for their future.
“Bringing back the LTA would be a colossal mistake, penalizing savers and inevitably adding a layer of unwanted complexity.
“The sensible thing Labor could do would be to quietly renege on its promise to reintroduce it.”
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