Pension update: Labour scraps plan for 55% tax raid on retirement savings: 'All parties should support!'

According to Labour, any potential revenue generated by the policy had not been included in the party's spending plans when in power despite claims the party faces an £800million spending deficit.

As a result, Sir Keir Starmer would theoretically not need to find the cash elsewhere to deliver on his promises when in Government.

However, the Conservative Party has claimed scrapping the pension tax raid will contribute billions of pounds more to Labour's £40billion "black hole".

This represents one of many reversals on fiscal policies from Sir Keir since becoming leader of the Official Opposition in 2020.

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What is the lifetime allowance?

This was the figure someone could build up in pension savings with incurring a tax charge from HM Revenue and Customs (HMRC).

In 2023, the lifetime allowance on pensions was set at £1,073,000 but was abolished by Chancellor Jeremy Hunt.

The decision to scrap the cap was to prevent experienced NHS workers from trying to avoid paying tax bills.

Before this recent policy reversal, Reeves had described the allowance's abolishment as a "tax cut for the wealthiest in society".

Speaking to The Financial Times, a Labour insider confirmed the cap would no longer be reapplied due to the "botched" way in which the Tories scrapped the allowance initially.

Earlier this year, thousands of investors with large retirement savings were left in the lurch due to errors resulting from the cap being ended.

Laura Strott, the Chief Secretary to Treasury, said: "Despite this U-turn, which adds another £3.2billion to their £38billion black hole, Labour has failed to rule out a swathe of pensions taxes and their retirement tax will mean the state pension being subject to income tax for the first time ever.

"It’s very clear that Labour will raid pensions, just like they did last time, making people’s retirement less secure."

Labour's decision has been welcomed by some in the financial services sector due to the confusion that has arisen over the past year.

Steven Cameron, pensions director at Aegon, explained: "This is something that all political parties should support.

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"We understand that the abolition might appear like a tax break for high earners, and not aligned to traditional Labour policy. But the removal has proven excruciatingly complex and attempts to reinstate could have tied the pensions industry, as well as a new government, in knots.

"There are many more greater pension priorities, such as implementing the 2017 auto-enrolment reforms and improving retirement income adequacy for an incoming government to progress."

A Labour source told the FT: "The Conservatives have botched their policy of abolishing the lifetime allowance, with thousands of people approaching retirement being left in limbo because of errors in legislation."

The Labour Party is expected to publish its manifesto on Thursday, June 13.