Jeremy Hunt’s multi-billion pound pensions giveaway in the Budget may not increase the number of people in work and could open an inheritance tax loophole for the wealthy, experts have warned.
The highly respected Institute for Fiscal Studies (IFS) think tank said the policy risked costing £100,000 per job, as it warned households will feel “continuing pain over the “next year as wages fail to catch up with prices during a "lost decade" of living standards.
Mr Hunt used his back to work Budget to abolish the tax-free cap on pensions savings and announce plans to expand free childcare to toddlers.
The moves were designed to stop doctors leaving the NHS early because they have hit the limit and convince more mothers back to the workforce.
But Paul Johnson, the IFS director, said removing the pensions cap was a £1bn sledgehammer “to crack a nut”. The policy “won't play a big part, if any, in increasing the number of people in work,” he said, adding it was difficult to predict if the move would convince doctors to stay in the NHS or allow more of them to retire earlier.
The independent Office for Budget Responsibility (OBR) estimates the pensions reform will increase the overall workforce by just 15,000. The Treasury has said it cannot say how many of them will be medics.
There are also estimates the childcare reforms will cost £70,000 per person they return to the workforce.
The IFS also warned the reforms could drive up the cost of the hours not covered by the subsidy. The current system, which applies to three- and four-year-olds, offers 30 free hours only for 38 weeks out of 52. Experts also point out that many parents who work full-time put their child in nursery for much more than 30 hours a week.
The IFS also warned that pensions pots are exempt from inheritance tax adding “so those are additional subsidies that are going to be handed out to people making very large savings under these reforms.”
The Resolution Foundation has also dubbed the reforms an “unneeded tax break for wealthy pension savers” that could see some workers choose to retire early or use their now uncapped pensions savings to avoid inheritance tax.
Torsten Bell, the think tank’s chief executive, said: “It’s a big victory for NHS consultants but poor value for money for Britain.”
Mr Johnson also said projections suggest disposable incomes will be barely higher in 2027 than in 2017 in what he described as a “lost decade for living standards”.
“What households are going to feel over the next year will be continuing pain. Inflation may be coming down, but prices remain much higher than two years ago. Earnings haven’t caught up,” he said.
Harriett Baldwin, Conservative chair of the Commons Treasury Committee, told a Resolution Foundation event she was “very surprised” that the abolition of the cap on the lifetime pensions allowance had not been limited to NHS schemes, as she had expected.
Labour said it will reverse the “pensions bung for the 1 per cent” if it wins power, though Mr Hunt accused it of shifting its position “overnight”.
The British Medical Association (BMA) previously estimated that a targeted removal of the pensions cap for NHS staff would cost £32m. But the OBR estimates that Mr Hunt’s move to help all high earners will cost close to £1bn.
Mr Hunt insisted he was “systematically” removing the barriers to work – arguing that the pensions move could help to reduce the amount spent on locum and agency staff in the NHS.
