Hunt to raise pension cap in boost for middle-class
Chancellor’s move to stop professionals retiring early
JEREMY Hunt will hand middleclass workers a pension boost next week in a bid to encourage them to extend their careers into later life.
Whitehall sources said the Chancellor will use the Budget to unveil ‘significant’ increases in pension allowances that are blamed for driving doctors and other professionals out of the workforce.
The £1million lifetime allowance on tax-free pension savings will see the first substantial increase for a decade.
The £40,000 cap on annual pension contributions will also be raised. Both moves are designed to tackle the so-called ‘pension trap’ which can leave some professionals facing punitive tax charges if they continue working into later life.
It is said to have led thousands of doctors to quit and is seen as a major barrier to encouraging them back. When the Government announced a six-year freeze in the annual allowance in 2020, the British Medical Association said it would ‘push doctors out of the NHS’.
Helen Morrissey, retirement analyst at Hargreaves Lansdowne, said raising the allowances was particularly helpful to those with final salary pension schemes.
But she warned against ‘tinkering around the edges’, saying a full review of the pension system was needed to remove disincentives to work, such as a £4,000 cap on pension contributions for people who go back to work after starting to draw down their pension.
‘The lifetime allowance is not a rich person’s issue any more,’ she said. ‘ Because of the way it has been reduced over time, it is now biting on a whole range of people who have long service, particularly where they are in a defined benefit scheme.’
Tory former minister Sir John Redwood added: ‘I have been very worried about the loss of a lot of experienced doctors, who say that taxation of their pensions is one of the big issues driving them out of the profession.
‘This feeds into the growth package because we need to keep more people in their fifties and sixties in work. But I am hoping for a much more comprehensive package to drive growth when we hear from the Chancellor next week.’
The lifetime allowance was set at £1.5million when it was introduced in 2006 and rose to £1.8million in 2010. But after a series of cuts it fell to £1million in 2016. It currently stands at £1,073,100, where it was due to remain until 2026.
The cuts have dragged large numbers of middle- class professionals into the tax trap. The annual maximum you can pay into your pension has also failed to keep pace with inflation.
It was slashed from £255,000 to just £50,000 in 2012 and cut again to £40,000 in 2014, where it has remained. Mr Hunt hinted at the move in January when he said ministers were determined to encourage more people aged over 50 back into the workplace.
‘To those who retired early after the pandemic or haven’t found the right role after furlough, I say: “Britain needs you,” and we will look at the conditions necessary to make work worth your while,’ he said. At the time, Treasury sources said although Mr Hunt was attracted to the idea of raising pension allowances there was ‘no money’ to do it at the Budget.
But a source said recent improvements in the public finances meant the move would now go ahead. Mr Hunt is understood to have £9.2billion in ‘headroom’ – a tiny fraction of the £97.5billion predicted by the National Institute of Economic and Social Research yesterday.
The pension shake-up is one of a range of ideas being considered as part of a major ‘workplace review’ led by Work and Pensions Secretary Mel Stride, which will be published alongside the Budget.
The workless figure has risen by around half a million since the pandemic, driven by an increase in over-50s leaving the workforce.
Labour shortages are blamed for driving inflation and contributing to the UK’s sluggish productivity growth. The Government is resisting pressure from business to relax immigration rules to offset the end of free movement with the EU.
‘Not a rich person’s issue any more’