Thousands of workers face huge retirement penalty under Labour as proposal to protect pensions from tax is SCRAPPED

SAVERS could face a hefty penalty in retirement as plans to protect thousands of workers from a pension tax have been scrapped.

Labour has U-turned on its reported plans to protect certain public sector workers when it brings back the Lifetime Allowance if it wins the next general election, The Sun has learned.

The Lifetime Allowance (LTA) is the total amount you can save into your pensions over your lifetime without incurring a tax charge.

The Party had previously indicated it would provide a "carve out" for doctors to prevent them from being stung by the pensions tax.

Meanwhile, reports earlier this month suggested Labour was planning to introduce separate rules for other "crucial" 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 was scrapping the policy in its 2023 Spring Budget.

The allowance is currently set to be abolished in April this year.

Shortly after the announcement, Labour said it did not agree with abolishing the allowance and announced bringing it back as a key pledge.

This proposal hasn't been overly popular, and Labour has since come under huge pressure from public sector workers who are most affected by the LTA.

As a result, it has announced a series of plans on how it intends to stop the policy from hitting them in retirement, such as suggesting it would create separate allowances for certain public sector professions.

Meanwhile, private sector workers would still be subject to the regular LTA in full.

Shadow financial secretary to the treasury James Murray tabled an amendment to the Finance Bill last year, asking the government to consider replacing abolishing the LTA with an approach that would only provide such benefits for NHS doctors.

Labour has now ruled out plans to create a separate system between private and public sector pensions or to create a "carve out" for public sector workers, according to Shadow Treasury insiders.

Rather, its ongoing policy work is now focusing on what level to reinstate the LTA at, while taking into consideration the substantial inflation seen since the level was last set.

It is understood the Party is still considering pressures on the public sector as part of this decision, but will look to retain public sector leaders through a more proportionate solution.

One industry source said these latest plans suggest Labour may instead set the LTA threshold at a higher level than it was previously set when it is reintroduced.

This would mean some workers currently affected would no longer be penalised by default.

Experts had previously said trying to have a separate system for public and private sector workers was unworkable and would create unfairness in the system, even if it protected crucial workers.

Steve Webb, partner at consultants LCP, said that if there has to be a Lifetime Allowance, it needs to apply to everyone equally.

"It would be both wrong and impractical to try to exempt people who had worked in particular sectors," the former pensions minister said.

"If the opposition is to avoid doctors and others voting with their feet and retiring early just in case, it will need to be clear about its plans well before the election so that people can make well-informed choices about pension saving and retirement."

What is the Lifetime Allowance and who is affected?

The Lifetime Allowance was last set at £1,073,100 although this is set to be abolished altogether from April.

It means you can't save more than this figure into your pensions without being hit with a tax charge.

The rules tend to affect higher earners who have the opportunity to save more into their pension over their lifetime.

However, certain public sector professions are particularly affected as they tend to work a lot of paid overtime due to pressure on their profession.

The punitive pension tax has meant many doctors have retired earlier than they might have otherwise to avoid being hit with a hefty bill - a situation the NHS can't afford.

The same issue has been seen in the teaching profession, with top head teachers retiring early because of the tax.

The threshold has also not been changed for several years, meaning more people have been affected as wages have risen.

Dean Butler, managing director for retail direct at Standard Life, explained: "Prior to last year's Budget, the allowance stood at just over £1million.

"This sounds like a huge sum but, in reality, this is the figure that a growing number of people were reaching, and which penalised people - particularly in the public sector - for diligent saving over many years."

While experts support removing inequality between professions and potentially raising the threshold - affecting fewer workers - they say it would be better for Labour to drop plans to reinstate the LTA altogether.

Tom Selby, director of public policy at pension firm AJ Bell, said: “Scrapping the LTA was a hugely positive move which at a stroke removed one of the biggest barriers to senior doctors taking on extra hours, alleviating pressure on the NHS. 

“The decision was also a big positive for savers, who no longer face penalties for doing the right thing and saving for their future. 

“Bringing the LTA back would be a colossal mistake, penalising savers and inevitably layering on unwelcome complexity into the bargain. 

“The sensible thing for Labour to do would be to quietly step away from its pledge to reintroduce it.”

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