Jeremy Hunt’s multibillion-pound tax giveaway to Britain’s wealthiest pension savers is coming under fire from various quarters, with Labour vowing to reverse the move andothers saying it is like using a sledgehammer to crack a nut.
Financial firms have said the changes to pension allowances could let high earners who can afford it build up pension pots worth as much as £9m while enjoying the full tax benefits.
So what has the chancellor done?
He has announced a massive boost to the amounts that high earners can put away for their retirement tax-free.
Hunt abolished the pensions lifetime allowance, which is the limit on how much people can build up in their pots over their lifetime while still benefiting from the tax perks for doing so. Up until now, anything over £1.07m was subject to a tax charge of up to 55%. It applies to all personal and workplace pensions, but excludes the state pension, and was due to be frozen at its current level until 2026. Instead of increasing the allowance, as had been rumoured before the budget, he scrapped it.
The chancellor also increased the annual allowance – which is the most someone can save in their pension pots in a single tax year before having to pay tax – from £40,000 to £60,000.
Why did he do it?
The government argues it was forced to act because the lifetime allowance has led many professionals including NHS consultants and GPs to take early retirement, and there have been predictions that more and more older public and private sector employees would change their behaviour or retire early to avoid being hit by penalties.
Hunt has said that “if you talk to anyone in the NHS, they will say doctors leaving the workforce because of pension rules is a big problem”. He added that “there are many doctors who are worried about hitting their pension cap who are deterred from taking on extra hours. So it’s not just the numbers who actually do hit the pension cap”.
Why is the giveaway so controversial?
These changes to pension allowances will cost the taxpayer vast sums. Official budget documents show that just abolishing the lifetime allowance will cost the Treasury a total of £2.75bn over five years (between 2023-24 and 2027-28). Add in the associated changes and the total bill over five years tops £4bn.
Yet Labour and commentators seized on a report from the Office for Budget Responsibility that indicated this costly shake-up is only likely to keep a few thousand doctors and other high earners working. The OBR is forecasting that the lifetime and annual allowance changes will “increase employment by about 15,000 by removing some financial disincentives to continuing in employment for those with large pension pots”.
Crucially, the OBR acknowledged there was “uncertainty” over what the ultimate cost to the taxpayer could be, because it all depends on how those affected decide to respond to the changes.
John Ralfe, an independent consultant and pensions expert, said in a letter to the Times that “this is not about supporting a hard-pressed NHS, it is really a tax giveaway for tens of thousands of the very highest earners – including “undeserving” City slickers – who can now shovel more money into their pensions, with bigger tax breaks”.
Will this make a difference to the numbers of staff leaving the NHS?
Dr Vishal Sharma, a cardiologist and British Medical Association pensions committee chair, told BBC Breakfast that the number of hospital consultants who had taken early retirement had tripled, while the number of GPs had quadrupled in the past decade.
“We are heading towards a sort of precipice where huge numbers were going to go unless things change,” he added.
Wesleyan, a specialist financial services firm for doctors, teachers and dentists, said its research had shown that a fifth of doctors had already left the NHS pension scheme because of these tax problems.
Who stands to gain?
It paves the way for some individuals to build up multimillion-pound funds. Someone paying in £60,000 a year for 30 years could build up a retirement pot worth £3.5m, with only income tax to pay on withdrawals above the tax-free cash entitlement, said Tom Selby at investment platform AJ Bell.
Financial services firm Aon said that if someone was able to save £60,000 a year for 40 years, their ultimate pot, including investment returns, could be many times the current lifetime allowance: “of the order of £9m” before allowing for inflation.
The changes also amount to a huge inheritance tax break. Financial firms say defined contribution pensions can be a tax-efficient way of passing on your wealth to your heirs because they are usually exempt from inheritance tax. Insurer Standard Life said that by removing the lifetime allowance, “there’s scope to pass on an unlimited sum for those who die before the age of 75 tax-free, or at the beneficiary’s marginal rate after that age”. It added that “it’s possible people will be able to pass pension wealth across multiple generations in the long run.”
Also set to gain are financial advisers and financial planners – who advise the well-off for a fee – and fund management companies.
Who doesn’t gain?
Aside from the majority of taxpayers who will pick up the tab but won’t benefit? Some other types of investment popular with the rich may now lose out if wealthy people decide to max out what they pay into pensions. M&G Wealth said the changes may lead to “a reduction in attractiveness of other tax-incentivised vehicles, such as venture capital schemes”.
What will it mean for the Tories politically?
Labour is hoping this will snowball and become this government’s equivalent of last year’s huge row over the plan to abolish the 45% top rate of income tax that kicks in on earnings above £150,000. That was announced by Liz Truss’s government but, days later, after widespread anger over the policy, ministers abandoned the move in a humiliating U-turn.
Some of the rightwing press have been less than complimentary about Hunt’s announcement: a Daily Mail headline said there was “Fury at ‘massive tax loophole’ for rich …”
Labour will seek to force a Commons vote next week on the decision. The shadow chancellor, Rachel Reeves, said that “this gilded giveaway is the wrong priority at the wrong time for the wrong people”, and that a Labour government would reverse the move.
However, the insurer Canada Life said that “you simply can’t play political ping-pong with the pensions system. People plan for the long term, and that relies on confidence that the goalposts won’t constantly shift.”
