For the first time we have just seen how readily Keir Starmer and Rachel Reeves will drop ideology for practicality now that it is the government-in-waiting.
Common sense has triumphed and the Labour Party has decided to quietly shelve its – let’s admit – unworkable plan to reintroduce the lifetime allowance.
In a vacuum of any detailed policy it had always seemed strange that Reeves, the soon-to-be chancellor, was so quick to say she would definitely reintroduce a cap on pension savings. It was a knee-jerk reaction to Jeremy Hunt’s shock 2023 Budget announcement that Labour presumed was a classic case of the Tories giving a big tax break to their high-earning core voters.
Reeves initially described Hunt’s move, incidentally a long-running Telegraph Money campaign, as “the wrong priority, at the wrong time, for the wrong people”. There were rumours it would be reintroduced but with carve-outs for doctors and “public sector leaders”. It quickly became obvious bringing a cap back without creating a ridiculously unfair system was impossible.
While this is a welcome change of direction (and one that could cost the future government as much as £800m) I am not sure savers can jump for joy just yet.
Whichever party wins, the consensus from economists is that there will be tax rises. Given that both main parties have ruled out raising the three big money spinners, income tax, National Insurance and VAT, that means a bit of creative accounting will be needed and there are plenty of ways Labour could pick the pockets of the pension system without breaking a manifesto pledge.
But back to the lifetime allowance and Reeves’ correct decision not to reapply the handcuffs to our savings.
Her reasoning will no doubt be driven, as it was by the Tories, to keep as many experienced public servants working – not only NHS consultants who were retiring early and turning down extra shifts as a result of enormous tax bills arriving out of the blue, but also senior teachers.
“No-one should be pushed out of the workforce for tax reasons”, Mr Hunt said, before scrapping the £1.073m limit.
The allowance was always a terrible policy and a bad way of controlling how much is spent on pensions tax relief. Firstly the way it worked meant it favoured people with defined benefit pensions, rather than the vast majority of private sector workers and their defined contribution plans.
Secondly, the cap applied to the total value of your pot, including any investment gain, allowing the state to steal hard-won returns it has absolutely no right to.
The annual allowance, now a very generous £60,000 a year for most people, is a far better way to control Government spending and it’s not hard to see that figure coming down (although this could reopen the problem faced by highly-paid NHS staff unl ess other reforms are made).
The time for poetry – if you can call Starmer’s campaigning style that – is nearly at an end for Labour, and now is the time for prose.
So how will it raise the cash needed?
Necessity has stopped it limiting pension allowances. We know that Reeves favours a flat rate of pension tax relief but she has clearly gone through the same process all chancellors do, and realised it’s just too complicated to force through, despite the riches it could offer the Treasury.
A growing number of pension experts think Labour could take aim at the generous tax treatment of pensions on death. Since George Osborne’s “pension freedoms” reforms and abolition of the 55pc pensions “death tax” a decade ago, savers have ploughed money into pensions as a smart way to avoid inheritance tax. Bringing unspent pension cash into an estate for IHT purposes would bring in serious amounts of extra cash.
More simply, Labour could continue the Tories’ old trick of freezing various allowances. When Hunt scrapped the lifetime allowance the fly in the ointment was the freezing of the tax-free lump sum at £268,275, a quarter of the old cap.
There are no plans for this figure to rise with inflation, so over time more of our pensions will be caught out. This trick, played out to devastating effect with income tax, has been the defining feature of both Rishi Sunak and Jeremy Hunt’s reigns as chancellors.
So-called “fiscal drag” has enabled the Conservatives to dramatically increase tax receipts without having to change the headline rates of tax.
Try as they might, economists and journalists are having a hard time getting the public enraged about a rising tax “burden” (the proportion of GDP made up of tax revenue). I’m expecting more accounting tricks over the next five years of Labour rule.