Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Labour has insisted Sir Keir Starmer made an “old fashioned mistake” when he said he would scrap the pension lump sum allowance if he wins next week’s general election, a gaffe that will be seized on by the Conservatives.
Asked on BBC Radio 5 Live whether Labour would remove the option for people to take a 25 per cent tax-free lump sum from their pensions, Starmer said incorrectly: “It runs out in a number of years.” He added: “We’re not going to renew it.”
Savers can usually take up to 25 per cent of the amount built up in any pension as a tax-free lump sum. New rules introduced in April this year capped this lump sum allowance at £268,275.
A spokesperson for Starmer said: “It was an old fashioned mistake.” Asked whether the Labour leader had accidentally let an undisclosed Labour tax plan out of the bag, the spokesman insisted: “Absolutely not.”
The Conservatives jumped on his comments as evidence that Labour has a secret plan to increase taxes, including those affecting pensioners — a key segment of voters.
Laura Trott, chief secretary to the Treasury said: “Keir Starmer has now opened up a third front to Labour’s war on pensioners by making it clear the ability to draw on 25 per cent of your pension pot tax-free is not safe under a Labour government, punishing people who have saved their whole lives.”
Labour quickly tried to defuse the issue. “The ability to withdraw 25 per cent of your pension as a tax-free lump sum is a permanent feature of the tax system and Labour are not planning to change this,” a spokesman said.
Asked whether Labour was making a solid promise not to change the current system — as opposed to simply having “no plans” — a spokesman said: “It’s a firm commitment.”
The spokesman added: “Keir was referring to temporary tax breaks in the system that are due to expire and which the public finances assume will not continue.” Labour gave the example of the temporary increase in the stamp duty threshold for first time buyers from £300,000 to £425,000.
Labour has explicitly ruled out in its manifesto increases to the rates of income tax, national insurance, VAT and corporation tax, which collectively account for about 75 per cent of all tax revenues.
That has led to speculation about which taxes the party might raise if it wins the election and needs to raise more cash.
Labour says it has “no plans” to raise taxes beyond the limited revenue-raising measures set out in its manifesto, such as higher taxes on private schools, private equity bosses, non-doms and oil companies.
The party’s failure to categorically rule out other tax changes — for example on capital gains tax or pension tax relief — has prompted Conservative leader Rishi Sunak to warn that taxes will rise under Labour.
“Mark my words, Labour will raise your taxes — it’s in their DNA,” Sunak said in a BBC TV debate on Wednesday.
Sir Steve Webb, a former pensions minister and partner with LCP, an actuarial firm, said the government would be unlikely to scrap the pension lump sum allowance.
“Politically, abolishing tax-free cash is unimaginable,” he said.
“Many millions of workers have saved into a pension in the expectation of a nice tax-free lump sum at the end, and scrapping it would be political suicide.”
However, he said it was “possible” a future government might reduce the generosity of the tax-free lump sum allowance.
“For example, the current lifetime cap of just over £268,000 could be reduced to £200,000 and still be at a level that had no effect on the vast majority of pension savers, and with protections built in for those already over the limit.”
Tom McPhail, director of public affairs with the Lang Cat, a consultancy for the pensions sector, said a reduction to the pensions lump sum allowance “would be easy enough to do” early into Labour’s term, but the challenge would be how to do it fairly.
McPhail said that If Labour was feeling “mean-spirited”, it could change the pension lump sum allowance in the first week after taking power, which would shut the door on anti-forestalling behaviour. “This would be the nightmare scenario,” he said.
He said Labour could also take a more considered view on pensions tax relief, which would see it announce any changes in a future fiscal statement after it had “looked at the books”, with any reforms coming into effect in the following tax year.
“Labour has said they are not going to do a Budget in the first ten weeks so we are not expecting an immediate fiscal event,” he said.
