Pension Lifetime Allowance reintroduced
Labour has announced plans to reintroduce the pension lifetime allowance, which limits the amount you can save into a pension without facing tax penalties. Previously, the allowance imposed a tax charge of up to 55% on total pension savings beyond £1,073,100.
Although the government abolished the allowance in 2023, Labour leader Sir Keir Starmer said he is “absolutely committed” to reversing this decision.
If reinstated, savers with large pension pots could again face tax charges if their savings exceed the £1,073,100 million threshold. The Conservatives have not clearly stated their plans regarding the lifetime allowance, but having abolished the cap only last year, there’s no indication they intend to reverse their decision.
The abolition aimed to encourage high-earning older workers to remain in the workforce amid concerns over the number of over-50s leaving. Commentators have suggested that reversing the decision now would be unwise. While attractive politically, reinstating the lifetime allowance poses significant practical challenges and risks. It could lead to early retirements among those with large defined benefit pensions, especially in the public sector, or prompt early withdrawals from large defined contribution pensions.
Labour is reportedly exploring ways to reintroduce the pension lifetime allowance without deterring senior public sector workers from continuing in their roles.
Triple-lock pensions commitment
Another key issue regarding pensions is the triple-lock system. The triple-lock ensures that the state pension rises yearly in line with inflation, average earnings growth, or 2.5%—whichever is highest. The Conservatives have outlined plans to increase the tax-free allowance for pensioners in line with the existing “triple lock” to ensure it rises yearly.
It would mean the state pension and retirees’ tax-free allowance – currently £12,570 – would increase in line with inflation, average earnings, or 2.5%, whichever is highest.
Labour has committed to retaining this scheme for the next parliament but has declined to match the latest Conservative pledge. Labour’s shadow Paymaster General Jonathan Ashworth said the announcement was “just another desperate move from a chaotic Tory party torching any remaining facade of its claims to economic credibility”.
The full new state pension is worth £221.20 per week or £11,542 per year. Tax thresholds are currently frozen until 2028, which means that if the full new state pension keeps rising from its current level, many pensioners who rely on it as their only income could end up being above the threshold and having to pay income tax.
However, the next government may consider increasing the state pension age sooner than planned. The age is already set to rise from 66 to 67 by 2028 and to 68 by 2046, but this timeline could be accelerated.
The state pension remains a crucial income source for retirees but is increasingly costly to maintain. With an ageing population, the number of pensioners is expected to grow by 25% by 2050. The cost of the state pension has risen from 2% of national income in 1948 to around 5% today and is projected to reach 6.4% by 2050.
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