Jeremy Hunt will use Wednesday’s Budget to lift pension allowances for higher earners in an effort to discourage early retirement and get them to extend their careers into later life.
The UK chancellor is set to increase the £40,000 cap on tax-free annual pension contributions — frozen for the past nine years — to £60,000. He will also return the tax-free lifetime allowance on pension pots to its 2010 level of £1.8mn, up from just under £1.1mn.
Hunt’s move is designed to tackle the problem that at current levels, the allowances are compelling many professionals, particularly doctors, to retire in their fifties.
The lifetime allowance was set at £1.5mn when it was introduced in 2006 before hitting £1.8mn four years later. It was cut to £1mn in 2016 and is at present £1,073,100, where it was due to remain until 2026.
Those with pension pots that exceed the lifetime allowance face an extra 25 per cent levy on top of income tax when they take it as income above that level or a 55 per cent tax charge if they withdraw money as a lump sum.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said “after years of cuts and stagnation, this would breathe new life into people’s retirement planning and could be instrumental in helping groups such as senior NHS consultants to remain in the workforce”.
But Torsten Bell, chief executive of the Resolution Foundation think-tank, said on Twitter that the reforms would “benefit a smaller number of rich people” but they would not encourage more people to remain in work. “Some doctors might stay in work but making other rich people richer [will encourage] them into retiring earlier.”
Tony Goldstone, deputy chair of the British Medical Association pensions committee, said he was “pleased that the government finally appear to be in ‘listening mode’”.
But the annual allowance (AA) was significantly more of a problem than the lifetime allowance (LTA), he added, and had also dropped much more from a peak of £255,000 in 2010/11, even without correcting for inflation and the addition of tapering.
“With bumpy pay scales/promotional pay increases etc, the reported level of £60,000, whilst a good step in [the] right direction, will still cause [a] problem — so why restore the LTA to near its peak, but AA to only a fraction of it?” he said in a tweet.
Carl Emmerson, deputy director of the Institute for Fiscal Studies, said the changes would help senior doctors and civil servants with large defined benefit pensions but that the two pension tax relief were “badly designed and in need of reform”. He added high earners with big pension pots benefited “from inappropriately generous tax treatment of pensions”.
Sir Steve Webb, a former pensions minister, also criticised the lifting of the thresholds, saying ministers would be using a “sledgehammer to crack a nut” if they reformed the entire system just to solve the problem of doctors leaving the NHS.
The move “could backfire” if people were able to reach their savings targets earlier and encourage them to “clock off earlier” than they would otherwise do, said Webb, a partner at investment consultant Lane Clark & Peacock.
Hunt will increase the money purchase allowance — the annual amount of tax-free money that people can contribute to their defined contribution pensions after they start claiming them — from £4,000 to £10,000.
The moves are part of a broader attempt by Hunt to get people back into work, including the scrapping of the work capability assessment to allow disabled people to try work without fear of losing their benefits.
Older workers will be offered “returnerships” giving flexible skills training that takes into account previous experience.
Another part of the package is extra help for working parents who can be deterred from returning to the workforce because of high costs of childcare. The poorest families who are eligible for universal credit will see the amount of money they receive for childcare rise almost 50 per cent, with parents able to claim the costs upfront rather than in arrears.