Labour’s pension tax raid plan will ‘hit millions’

Party’s aim to restore lifetime contributions cap throws financial industry into turmoil

JEREMY HUNT’S back-to-work drive is under threat as Labour prepares for a tax raid on up to two million pension pots.

Rachel Reeves, the shadow chancellor, announced the party would reverse the Chancellor’s decision to scrap the cap on the amount people are allowed to put into their pensions before being taxed.

An analysis showed that in two years’ time, by which point Labour could have won a general election, two million people could face paying taxes of up to 55 per cent on their savings as a result of Ms Reeves’ policy.

Former pension ministers lined up to criticise Labour last night, saying the announcement could encourage people to “panic buy” pensions for the next two years before taking early retirement if Labour wins the election.

The uncertainty has thrown the financial industry into chaos, with pension advisers saying they had been inundated with calls from savers already looking for ways to protect their nest eggs from the risk of a Labour government.

Sir Iain Duncan Smith, the former work and pensions secretary, said: “This is a mistake by Labour. They have taken the bait and not thought this through. Labour is saying that people should come back to work but not be able to add to their pension. Why not? It’s their money.

“We need people to return to work but they are not going to do so if they are penalised in this way.”

John Baron, a Tory member of the Treasury select committee, said Labour was promoting “class war” by penalising the well-paid.

Currently, people have to start paying up to 55 per cent tax if their pension pot exceeds £1.073million.

In Wednesday’s Budget, Mr Hunt announced that the lifetime cap of £1.073 million on pension savings would be abolished from April next year, under Conservative reforms designed to encourage more over-50s to return to the workforce.

Ministers are concerned because the UK is the only major country where economic inactivity – the number of people aged between 18 and 65 who are not in work – is higher than before the pandemic.

Lifting the cap means savers can contribute to their pension – and benefit from tax relief – indefinitely without incurring a penalty.

The Government fears that, under the current limit, some people who would otherwise have kept working have retired because they hit the maximum tax-free amount.

However, Labour has pledged to reverse the reforms if it wins the next election, claiming that they only benefit the “top 1 per cent” of workers.

Ms Reeves said: “At a time when families

‘We need people to return to work but they are not going to do so if they are penalised in this way’

across the country face rising bills, higher costs and frozen wages, this gilded giveaway is the wrong priority, at the wrong time, for the wrong people. That’s why a Labour government will reverse this move. We urge the Chancellor and the Conservative Government to think again, too.”

She promised, however, that Labour would introduce a separate scheme allowing doctors to pay into pension pots tax-free, amid fears that hundreds of NHS consultants are considering early retirement. Pension tax rules have have been a particular obstacle for health service doctors. Unlike private,

sector workers, they are unable to control how much money goes into their pension because they are members of a generous “defined benefit” scheme.

For many, the only way to avoid large, unexpected tax bills has been to reduce their working hours or retire early.

Labour currently has a 22-point lead over the Conservatives, according to a Yougov poll this week. The next general election must be held by January 2025.

Reinstating the cap of £1.073million under Labour could affect as many as 2million non-retired people, according to new estimates from the consultancy LCP. These are people who have already passed the cap, or are close to doing so, meaning they will be liable for a major tax bill if the limit is reimposed.

Sir Steve Webb, a former Liberal Democrat pensions minister and now partner at LCP, said that the threat of a Labour government could spark a “stampede” of people saving into their pensions, and retiring before Labour overhauls savings rules.

“The risk of Labour’s announcement is that it could kick off the panic-buying of pensions,” he said.

“If people think the tax break is going to disappear in two years, they might think ‘I’m going to max it out and retire before the election’. That is certainly what financial advisers will be saying.

“This would cost the Government money now, because the government has to fund this tax break.

“It means that hundreds of thousands of people could decide it was worth their while to max out now – a sort of gold rush – before retiring early when Labour come in.”

Baroness Ros Altmann, the former Conservative pensions minister, said: “The Labour announcement is another classic example of dreadful political tinkering with pensions that undermines confidence time and again. It never made sense to punish good longterm investment performance in pensions.

Having a lifetime allowance should not be needed if there is a limit on annual contributions.

“It seems nonsensical to have both, and deters some of the higher-return investments which the economy really needs.”

Andrew Jones, the former Treasury minister, said: “This is a policy announcement in the Budget which is solving a problem that has been in place for a while. So all that they would be doing is recreating the problem.”

A Tory source said: “The pensions cap is pushing doctors, head teachers, air traffic controllers and top brass in the Armed Forces into early retirement. Scrapping the cap is the quickest and easiest way to allow our most experienced workers to keep contributing.

“Labour’s tax changes would mean fewer teachers, fewer doctors, worse airline safety, and a smaller, less experienced military.”

Other Tory MPS decried the announcement as “the politics of envy”.

Mr Baron said: “I do believe that Labour is trying to play the class war on this issue, when in reality the policy aimed at trying to ensure that we retain good people within the workforce.”

Figures in the pensions industry also criticised the announcement.

Steven Cameron, of the pension provider Aegon, said: “It’s really unfortunate that pensions, which are very long-term savings, can become a political football subject to major change when a different political party is in power.

It’s really unhelpful when individuals are saving in good faith only to find the rules change to their detriment.”

Nigel Peaple, of the Pension and Lifetime Savings Association, a trade body, said that the divide in government ran counter to the need for “simplicity and stability” in retirement planning. David Penney, a financial planner based in London, said: “Labour have created a situation now where people have to pre-empt government policy when planning for their pensions. It has caused massive levels of uncertainty.”

Speaking in the House of Lords, Lord Willetts , the former Tory minister criticised Labour’s decision to have a separate pension scheme for doctors.

“This is essentially a healthcare recovery measure,” he said. “You can’t have one tax rule specifically for NHS consultants and a different pensions tax rule for everyone else.”

Asked whether they were concerned that its policy could push more people into early retirement, a Labour source said: “When you’re in government and have been through a period where the public finances were battered, you have to work out what your priorities are. We think this is the wrong priority.”