Boost for pensions as Hunt ready to raise cap

New threshold may be over £1.5m in order to tackle rising trend of early retirement

JEREMY HUNT is preparing to boost the tax-free allowance for pensions by more than half a million pounds as he battles the wave of early retirement that has squeezed growth.

The so-called lifetime allowance (LTA), which is the maximum amount workers can pay into their pensions before they are taxed, is expected to be lifted from just over £1million in the Chancellor’s maiden Budget tomorrow.

The move will bring the LTA closer to its previous peak of £1.8million, which was cut by George Osborne.

While the exact level has not been finalised, sources indicated that it will be more than £1.5million. The threshold was previously frozen at £1million until 2028.

Dubbed the “doctors’ tax” by some MPS, including the Conservative Growth Group of former Trussites, gradual cuts to the lifetime allowance by George Osborne, the former Chancellor, mean many highly paid workers, including NHS doctors, have reduced their hours or retired early.

The Centre for Policy Studies (CPS) think tank described the LTA limit as the biggest “impediment” to staying in work for those affected.

It agreed that lowering the pensions cap from £1.8million in 2011 to £1million by 2016 had “hastened the retirement of some older workers”.

It is also understood that Mr Hunt will allow workers to contribute up to 50 per cent more to their pensions each year before being hit by the taxman, with the annual allowance expected to increase from £40,000 to £60,000.

The money purchase allowance, which limits the tax relief people can enjoy on contributions made after they have started claiming their definedcontribution pension, will also be raised from £4,000 to around £10,000.

The Institute for Fiscal Studies (IFS) estimates that changes to annual and lifetime allowances since 2010 bring in an extra £8billion a year to the Exchequer. The think tank said that lifting the LTA would cost much less over the next five years. It calculates that a 10 per cent uplift will cost £330million annually after five years. Each further 10 per cent uplift would cost less.

The reforms will focus on raising thresholds rather than removing some of the complicated quirks of the pensions system, which it is claimed have driven some into early retirement.

Paul Johnson, director of the IFS, criticised “ridiculous” tapering rules that take effect for people who earn more than £240,000. Anyone who breaches this threshold has their annual allowance reduced to as little as £4,000.

Mr Johnson said: “If you increase the annual allowance from £40,000 to £60,000, but then taper it so that people with high incomes can’t use it, it’s probably not going to be massively effective. But then if you do get rid of it, the policy becomes much more expensive.”

Mr Hunt’s Budget will be delivered against a backdrop of a banking industry in crisis and forecasts that interest rate rises will come to a halt.

The Bank of England is expected to raise interest rates one more time to 4.25 per cent, from a level of 4 per cent.

It comes after Joe Biden, the US president, failed to calm financial markets following the collapse of Silicon Valley Bank (SVB). Rishi Sunak also said that British people do not need to worry about the collapse of SVB evolving into a wider banking crisis.

While on a trip to the United States, he said: “I think the Bank of England Governor was right and the Chancellor was right to address this and make it clear that, actually, our banks are well capitalised and they don’t have any concerns about systemic risk.”

It comes after HSBC rescued SVB’S UK arm in a late-night deal that was announced before markets opened in London. Later yesterday, shares in US banks plummeted as fears of contagion took hold and investors grew concerned government and regulators had failed to do enough to stem a wave of investors withdrawing deposits.

Stock markets plunged and US borrowing costs fell as the decision by reg- ulators to shut down the bank and take control of deposits caused a flight to safe assets, including gold and government bonds.

Mr Hunt’s Budget is expected to focus on getting more Britons back to work, which the CPS, co-founded by Margaret Thatcher in the 1970s, said was “one of Britain’s biggest economic challenges”.

The CPS urged Mr Hunt to do more to help young people gain employment, highlighting an “extraordinary gender divide among those leaving the workforce, with men outnumbering women by more than three to one”.

It blamed the disparity partly on “work and conceptions of masculinity”, while a housing crisis has also resulted in record numbers of people living with their parents into their thirties, which the CPS said, “might be creating similar dependency patterns and forms of escapism from working life”.

‘Our banks are well capitalised and they don’t have any concerns about systemic risk’