Labour has backtracked on its pledge to reinstate the pension lifetime cap, a move valued at £800 million. This U-turn has attracted criticism and sparked a heated political debate.
Rachel Reeves, Labour’s shadow chancellor, asserts that this reversal will not impact the party’s spending plans, despite Tory claims of a growing ‘black hole’ in Labour’s finances.
Labour’s Policy Reversal
Rachel Reeves abandoned the pledge to reinstate the lifetime cap on tax-free pension savings. Labour says this will not affect their spending plans as the revenue wasn’t budgeted. However, the Conservatives believe this decision will add billions to an already significant financial deficit.
The lifetime allowance, which was £1.073 million, was abolished in 2023 by Chancellor Jeremy Hunt to retain experienced NHS staff who were retiring to avoid hefty tax bills. Initially, Reeves promised to reverse this, dubbing it a ‘tax cut for the wealthiest.’
Impact on NHS Staff
Despite Labour’s assurances to protect doctors, the policy had raised concerns of an NHS staff exodus. The Office for Budget Responsibility noted that abolishing the cap amounted to an annual £800 million tax cut.
Labour’s decision to scrap the reintroduction of the cap aims to avoid further confusion. They describe the Conservatives’ policy as ‘botched,’ leaving many investors uncertain due to legislative errors.
Political Reactions
A Labour source told the Financial Times about the Conservative mishandling of the policy.
Laura Trott, Chief Secretary to the Treasury, argued Labour’s U-turn would add £3.2 billion to their financial deficit. She accused Labour of planning a ‘raid’ on pensions by not adopting the ‘triple lock plus’ policy, which protects the state pension from tax.
Trott stated, ‘Despite this U-turn, which adds another £3.2 billion to their £38.5 billion black hole, Labour has failed to rule out a swathe of pensions taxes.’
Labour’s Defence
Labour’s decision appears to counter accusations of planning a tax increase. Sir Keir Starmer had already ruled out rises in income tax, National Insurance, or VAT.
The Tories have focused their election campaign on tax policies, claiming Labour plans to increase the financial burden on families by £2,000 to cover their spending.
Sir Keir Starmer dismissed these claims as ‘deliberate lies,’ insisting that all Labour policies are ‘fully-costed and fully funded.’
Official Statements
Bridget Phillipson, the shadow education secretary, confirmed the decision not to reinstate the cap.
On Sky News, she emphasised the need for stability, saying, ‘It wouldn’t have been our priority to make that change, but the Government has created uncertainty for people looking towards retirement.’
Phillipson added that Labour’s goal is to ensure stability and security going into the election.
Labour’s U-turn on the pension lifetime cap has stoked political tensions and fuelled debates over fiscal responsibility. However, they maintain that this decision will not derail their financial plans.
As the election approaches, both parties are likely to continue sparring over economic policy, each claiming to offer the more stable future for the nation’s finances.