by Reversing abolition of lifetime cap could throw back-to-work plans into chaos, experts warn
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 that the party would reverse Mr Hunt’s decision to scrap the cap on the amount people are allowed to put into their pensions before being taxed.
But 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 pots as a result of Ms Reeves’ policy.
Former pension ministers lined up to criticise Labour, 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 also thrown the financial industry into chaos, with pension advisers reportedly 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.”
And John Baron, a Tory member of the Treasury select committee, said Labour is promoting “class war” by penalising the well-paid.
“I do believe that Labour is trying to play the class war on this issue, when in reality the policy is aimed at trying to ensure that we retain good people within the workforce,” he said.
In Wednesday’s Budget, Mr Hunt announced that the lifetime cap on pension savings would be abolished from April 2024, 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 government 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 one per cent” of workers.
Ms Reeves said: “At a time when families 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 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 published this week. The next general election must be held by January 2025, meaning the lifetime allowance could be removed for just nine months.
Reinstatement of the cap at £1.073 million under Labour could hit as many as two million non-retired people, according to new estimates from the consultancy Lane Clark and Peacock (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 now 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.”
