Pensions targeted in stealth tax raid
Millions of retirement savers face new hit as Sunak and Hunt freeze lifetime allowance
‘The lifetime allowance was meant to stop the super-rich creaming off too much in pension tax relief ’
RISHI SUNAK and Jeremy Hunt plan to reveal a stealth tax raid on pensions later this month as they push to balance the books and reassure the markets.
The Daily Telegraph has learnt that the pension lifetime allowance is set to be frozen for two more years, with a rise in line with prices delayed from 2025 to 2027.
It means two million savers now face tax charges of up to 55 per cent on their retirement funds by the end of that period, according to expert analysis.
The approach comes with the future of the pensions triple lock – which guarantees state pensions will rise by the highest of 2.5 per cent, earnings or inflation – hanging in the balance.
The extended freeze is expected to hit private-sector savers more than publicsector workers, given Treasury calculations for the lifetime allowance are more generous for the latter group.
There are signs of discontent among Tory MPS that the Government is disproportionately targeting savers in its effort to bring down government borrowing via spending cuts and tax rises.
The Telegraph revealed yesterday how the Treasury was looking at increasing capital gains tax rates and allowances, prompting criticism from Tory backbenchers.
Since the Tories entered Downing Street in 2010, squeezes on pension tax relief have been the second biggest source of increases to the tax burden, according to the Institute for Fiscal Studies, a think tank.
It has also emerged that VAT is set to be charged on electric vehicles for the first time. But No10 yesterday said that the Sizewell C nuclear power station would still be funded, after reports that it was in the Treasury’s crosshairs.
Baroness Altmann, the former Tory pensions minister under David Cameron, said further freezing the lifetime allowance could inadvertently encourage public sector workers to take early retirement.
Baroness Altmann said: “People in the NHS and other parts of the public sector will increasingly be driven to retire early rather than work longer like we need them to.
“That is because tax rules that were meant to be a workplace benefit are becoming a workplace penalty. This is the economics of the mad house.”
Mr Sunak and Mr Hunt need to fill a fiscal black hole of around £50billion in the Autumn Statement on Nov 17 and have agreed to split the cost roughly equally spending cuts and tax rises.
Treasury sources have spelled out the broad approach to The Telegraph. The Prime Minister and Chancellor do not want to break 2019 Tory election manifesto promises or raise the rates of major taxes.
They are also determined to make sure the well-off carry more of the burden for the tax rises than the poorest and want that to be clear in impact assessments of their measures.
It means much of their focus has fallen on changing tax thresholds, which are when people start paying certain taxes, and allowances, which are the amounts people can earn tax free.
The pension lifetime allowance is £1,073,100. Savings over that limit are taxed at 55 per cent if the money is taken as a lump sum or at 25 per cent plus your income tax rate if taken out gradually.
It means £100,000 of savings above the threshold withdrawn at once would trigger a £55,000 tax bill.
Untouched pension pots that exceed the lifetime allowance are taxed at 25 per cent above the threshold on the saver’s 75th birthday.
In the past, the allowance level has risen with prices, meaning that savers do not lose out if inflation soars, as it is currently. But last year Mr Sunak froze the allowance until 2025. The move was forecast to bring in the Treasury close to a billion pounds over the period, because as prices rise more people’s savings go over the allowance, leading to new tax bills.
The Treasury is preparing to announce that the freeze will be extended until 2027, the end of the fiveyear period for which plans will be produced.
Such a change is often dubbed a “stealth tax” because it results in more people paying tax even though the overall rate of tax is not increasing. Analysis from the pensions consultancy LCP suggests that before the first freeze little more than one million savers were at risk of breaching the allowance.
The five-year freeze put around 500,000 more at risk, and a further twoyear freeze would bring the total at risk to two million, LCP estimates.
Steve Webb, the former pensions minister who is now a partner at LCP, said: “When the lifetime allowance was first created it was designed to stop the super-rich creaming off too much in
pension tax relief over their lifetime. But a series of cuts and freezes has meant the LTA is now an issue for far more people.”
Given the lifetime allowance move affects private sector pensions more than public sector pensions, it could be pointed to by ministers to counter criticism of wider public sector cuts.
When it was introduced in 2006, the allowance was £1.5m. It was raised to £1.8m in 2010, cut to £1.5m, then down to £1.25m and eventually to £1m in 2016. It rose with inflation until 2021 when it was frozen by then chancellor Mr Sunak at its current level for five years. Estimates at the time suggested the freeze would raise £990m for the Treasury as inflation dragged more savers above the allowance. If new Chancellor Mr Hunt were to extend that freeze by a further two years, it would force pensioners to hand over an extra £400m in tax, analysis by wealth firm Quilter suggests.
In total, the now seven-year freeze on the lifetime allowance would raise £1.4bn for the Government. But while a rising number of savers will be dragged into paying the tax charge, former public servants are better protected from penalties that arise from the lifetime allowance. This is because for savers in defined contribution pensions, the limit applies to the value of your invested pot. For members of public sector schemes, the value is typically calculated by multiplying their expected annual pension by 20. This means a retired public sector worker can have a retirement income of £53,655 without hitting the cap, while a private sector worker with a pension at the cap would receive an income of £45,740 if they were to buy an annuity at current rates, according to analysis from the Retirement Planning Project.
Speaking to The Times, Mr Sunak described inflation as the “number one enemy, as Margaret Thatcher rightly said”. “Inflation has the biggest impact on those with the lowest incomes. I want to get a grip of inflation,” he added. Mr Sunak also promised to tackle rising mortgage rates – “one of the biggest bills people have”.
He said he hoped the coming budget would be seen as a mark of compassionate conservatism, whilst emphasising the Tory party as one of “sound finances”.
“You will rightly be able to judge is that [the autumn budget] a fair approach. Is that a compassionate approach? I’m confident that people will feel that it is, but I don’t want to pre-empt what the chancellor is going to say,” he said. He said that the Conservatives could “absolutely” claim to be the party of low taxation but added it was “also the party of sound finances”.
“That is a bedrock of what it means to be Conservative,” he said.