Budget 2023: Warning pension tax breaks may make some retire early

Tax breaks meant to encourage wealthy pension savers to stay in work for longer are “poor value for money” and may not work, a think tank has warned.

The changes, which could cost £1.2bn, may encourage early retirement, said the Resolution Foundation, which focuses on low income earners.

The government’s independent forecaster said the plan could boost employment by 15,000, a fraction of the UK workforce.

The chancellor said it would keep more doctors in work, helping the NHS.

But Labour’s Shadow Chancellor Rachel Reeves described them as a “£1bn pensions bung for the 1%”.

Under the plans announced in Wednesday’s Budget, the tax-free limit for pension savings during a lifetime will be abolished in April.

At present, people can save just over £1m before an extra tax charge is levied.

The annual allowance will remain in place, but will go up from £40,000 to £60,000, after being frozen for nine years. Those who are already drawing a pension, but want to save more will be able to put in £10,000 a year, up from £4,000.

Chancellor Jeremy Hunt insisted the abolition of the lifetime allowance was the quickest and simplest way to solve issues with NHS doctors and consultants, who have been retiring early, reducing hours or turning down overtime for tax reasons.

However, the Resolution Foundation said the plan was “unneeded” and the benefits of it had been overstated.

It added that it would cost around £80,000 per extra worker, and that giving pension savers “very large wealth boosts will actually encourage some people to retire earlier than they otherwise would have done”.

“It’s a big victory for NHS consultants but poor value for money for Britain,” said Torsten Bell, chief executive of the think tank.

The Institute for Fiscal Studies think tank echoed the concerns, saying the move “probably won’t play a big part, if any, in increasing the number of people in work”.

Labour vowed to “reverse” the plan if it wins the next general election and replace it with a scheme targeted at doctors rather than a “free-for-all for the wealthy few”.

It come as the government is freezing general tax thresholds, which will drive up many people’s tax bills.

The move is expected to raise more than £30bn by 2028, the bulk of this coming from taxes on employees’ income.

It will also create 3.2 million new income taxpayers and 169,000 more will have to pay VAT.

Many in the pensions industry say the lifetime allowance has been a barrier to encouraging pension saving. Experts say removing it could mean wealthy people put money away.

There are also inheritance tax implications, which suggests people may put more money into pensions. Any funds that remain in a pension are not subject in inheritance tax.

In addition, if somebody dies before 75, any funds remaining in their pension is also free from income tax.

However, the effect could be limited as savers who believe the lifetime allowance will return under a Labour government, possibly after the next election, may be less inclined to put a lot of money into their pension.