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, which has been frozen for nine years, to £60,000. He will also increase the lifetime allowance on tax-free pension pots from £1mn to £1.8mn, returning it to its previous level last seen in 2010.
The move is designed to tackle fears that the current allowances are compelling many professionals, particularly doctors, to retire in their fifties. The problem has become more acute since the government announced a six-year freeze on the annual and lifetime allowances in 2020.
Anyone who saves more than the lifetime allowance faces a 25 per cent levy on additional income from their pension or a 55 per cent tax if they withdraw it as a lump sum.
The British Medical Association, which represents doctors, has warned that the “punitive pensions taxation system” has led to large numbers of doctors either retiring early or reducing their hours.
The lifetime allowance was set at £1.5mn when it was introduced in 2006, rising to £1.8mn in 2010. But it was cut to £1mn in 2016 and is currently £1,073,100, where it was due to remain until 2026.
Sir Steve Webb, a former pensions minister, has criticised the lifting of the thresholds, saying on Friday that 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, partner at Lane Clark & Peacock, the investment consultant.
Separately 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 move is 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 by nearly 50 per cent with parents able to claim the costs upfront rather than in arrears.
Hunt is also expected to freeze fuel duty and keep the recent 5p cut in petrol and diesel for another year at a cost of about £6bn.
The chancellor is also expected to cut taxes on capital spending by business, partly offsetting a rise in the coming weeks of corporation tax from 19 per cent to 25 per cent and the ending of the “super deduction” tax break for investment.
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