General election 2024: Uncertainty surrounding the state pension triple lock, the pension lifetime allowance and inheritance tax

As we are potentially looking at a change of government, there are many urgent questions regarding what will happen to people’s pensions (both state and private) along with what options will be available for those looking to pass on their wealth. So far, neither party has provided many answers.

While the party manifestos haven’t been published yet, Labour has promised not to hike VAT (except for extending it to private school fees), which means both parties have pledged not to raise any of the three biggest levies (income tax and National Insurance are the other two). These account for the largest share of Treasury revenues. Labour has also vowed not to raise the headline rate of corporation tax, which is the fourth biggest fundraiser.

So the biggest question is, will the Treasury have enough money to fund future spending plans?

According to the Institute for Fiscal Studies and the International Monetary Fund (IMF), there is a funding gap of £30 billion based on both Labour’s and the Conservative’s public finance projections.¹

Media speculation has grown that a new government might look at the tax treatment of pensions or certain inheritance tax reliefs to fill this hole. Please do bear in mind that at this stage, you should be careful of acting on speculation. It’s also extremely unlikely that any changes would take effect prior to 5 April 2025.²

Rishi Sunak surprised many with details of the ‘triple-lock plus’ policy. Although he may not be able to put this into effect, his comments do shine light on debates surrounding the state pension and frozen allowances for everyone.

The triple lock was first introduced to the UK state pension back in 2010. It was set up to make sure that state pensions would not lose their value in real terms against inflation. Under Mr Sunak’s triple-lock plus plans, the tax-free personal income tax allowance would increase annually in line with the state pension. The allowance would be age-related and allow pensioners to keep it above the rate of the state pension. Ultimately, this would lead to two different personal allowances - one for people of working age and another, higher one for retirees. Labour seems unlikely to match this.

One of the main issues regarding the triple-lock and the triple-lock plus is affordability. A triple lock-plus could also be more generationally divisive than its predecessor. At this stage, it’s unclear what sort of personal allowance would apply to those who worked or are still working after they have reached the state pension age. Additionally, it would add another layer to the already highly complex UK tax system.

Jeremy Hunt’s surprising abolition of the pension lifetime allowance was widely welcomed in 2023, but some of the details of how this works in practical terms have caused enduring uncertainty. Labour’s potential plans to reinstate it are no clearer.

If Labour do bring back the pension lifetime allowance, the key questions will include:

• What will the new pension lifetime allowance threshold be?
• Will there be any special treatment for highly paid NHS clinicians?
• What transitional protections might there be (as applied when the lifetime allowance was first introduced and subsequently reduced)?

It is important to bear in mind that as the pension lifetime allowance was removed from the statute book, a new government will not have the power to simply and quickly switch back to this previous regime. If the Labour party were to bring the pension lifetime allowance back, new legislation will need to be passed off the back of a Budget. Shadow Chancellor Rachel Reeves has confirmed there will not be a summer Budget if Labour win, so any changes are likely to take months to be proposed and introduced. Applying it retroactively would be highly unlikely too, as pension legislation has never been retrospective.

There is still a potential window of opportunity available if you have previously stopped making pension contributions due to concerns about pension savings exceeding the lifetime allowance. Contributing into a pension has a number of benefits and it may be worth seeking financial advice to see whether or not now is a good time for you to start paying into a plan again. But remember, a pension is an investment. As with any other type of investment, you might get back less than you pay in.

As well as removing the pension lifetime allowance, Jeremy Hunt also surprised the industry by making increases to the amount of tax-relieved savings you can make during each tax year through the annual allowances. The standard pension annual allowance was increased from £40,000 to £60,000, with the money purchase annual allowance (MPAA) increasing from £4,000 to £10,000. For those earning more than £260,000, the maximum tapered annual allowance increased from £4,000 to £10,000. At the same time, Jeremy Hunt reduced the level at which additional rate tax is paid from £150,000 to £125,270.

A combination of the ability to contribute more into your pension, at the same time as an increase on the tax reliefs available to those earning above £125,270, has increased the cost of pensions tax relief to the Treasury. Any new Chancellor could potentially reduce the annual allowances or be more radical and change the tax reliefs available.

We cannot say for certain whether Labour will increase the rate of inheritance tax, but they have previously suggested that some inheritance tax exemptions and allowances are too generous in their present form.

At the moment, pensions can be passed on free of inheritance tax on death. The Labour Party have not explicitly stated that they plan to change this but think-tanks have drawn attention to this rule previously and said it is an anomaly. It is possible that a newly elected Labour government might look to review the tax status of pensions on death.

Business relief and agricultural property relief can also help mitigate inheritance tax, although these schemes are not without substantial risk. It’s recently been pointed out how these schemes have helped to reduce the bill of some larger estates. The eligibility of most AIM shares for business relief has also been brought into question.³

That is not to say that a Labour government will remove the benefits of these reliefs. There are many legitimate reasons behind business and agricultural inheritance tax relief. They are in place to help both family and rural businesses keep going following the death of the owner. By helping businesses to keep afloat in this way, jobs and community value is saved.

When looking at removing AIM shares from business relief, any government will need to take into account that this attached relief seeks to encourage private investment into small British firms.

Any government may choose to remove some of the inheritance tax benefits currently available but they would need to consider the longer term and wider implications of doing so carefully.

We aim to keep all of our clients’ portfolios adaptable to any sort of change, including a new government. If you have any questions about the potential changes being made after the general election, if you should be taking action now or how to keep your finances flexible, book an initial consultation online or by calling 020 7189 2400, or speak to your usual Evelyn Partners contact.

¹Source: Financial Times, UK voters resigned to tax rises despite Tory and Labour assurances, May 2024

²Source: Financial Times, Labour urged to act over ‘overly generous’ pension tax breaks, June 2024

³Source: Financial Times, Fresh calls for action on IHT breaks after 68 estates shelter £1.8bn in assets, June 2024