Pension tax plan may get over-50s back to jobs

THE amount that can be saved into pensions tax-free could be increased as part of efforts to encourage the over-50s to get back to work.

Ministers are considering the change as part of a drive to help millions return to the workplace and end what Jeremy Hunt, the Chancellor, yesterday described as the “enormous and shocking waste of talent and potential” in Britain’s economy. At present, people have to start paying as much as 55 per cent tax if their pension pot exceeds £1.073million, meaning many decide it is not worth their while continuing to work once they reach this threshold.

Ministers are understood to be looking at increasing this lifetime allowance to encourage more over-50s to stay on in work.

It comes after Mr Hunt promised a “fundamental programme of reforms” to get as many people into the workplace as possible.

He said it was vital to get people back to work if the country was to solve its “productivity puzzle”, as he told those who never returned to work after the pandemic: “Britain needs you.”

Mr Hunt said that around one fifth of working-age adults are economically inactive, adding: “Excluding students, that amounts to 6.6million people.

“An enormous and shocking waste of talent and potential. Of that 6.6 million people, around 1.4million want to work,

but a further five million don’t.” Speaking to The Daily Telegraph, Mr Hunt also revealed that he wanted to prioritise cutting taxes on businesses ahead of cutting taxes for workers.

He told Chopper’s Politics podcast: “If you’re saying to me, ‘do I want to get taxes down?’ – yes, I do. If you’re saying ‘where would I prioritise?’ – my first priority would actually be to bring down business taxes.”

Mr Hunt also made clear that he now wanted more people back in the office, in a signal that he now opposes the “working from home” culture.

He said: “We need to get back to people being in the office, working as teams, getting all the benefits from being with lots of other people, bouncing ideas off each other, all those watercooler moments. That is a part of life and we need to get it back.”

Ministers are concerned that for too many people the current pensions system means it makes no financial sense to work longer. The lifetime allowance is the amount that someone can save in total for their pension without incurring a tax charge.

It has been frozen at £1.073million since the 2020-21 tax year, and has almost halved over the past 11 years.

The freeze means that more and more pensioners have been caught out by the rule. Any savings over the limit are taxed at 55 per cent if the money is taken as a lump sum, or at 25 per cent plus the person’s income tax rate if taken out gradually.

It means if someone were to withdraw £100,000 of savings above the threshold at once, it 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.

The limit on pension savings has increasingly affected senior doctors in the NHS, with five-figure tax bills forcing many to take early retirement.

Unlike private sector workers, NHS staff cannot control how much is saved in their pension each year, so the only solution is to reduce their hours.