Fury over pensions ‘hokey-cokey’ that has hit 1.6million savers as Chancellor prepares ‘to lift £1m allowance’ in Budget
- Lifetime tax-free allowance is expected to rise from £1.07M to £1.8M tomorrow
- Employees near retirement will be unable to make up for lost years of savings
Financial experts today blasted ‘hokey-cokey’ rules that have made it impossible to plan for retirement and penalised up to 1.6million savers.
The lifetime tax-free allowance is expected to rise from £1.07million to up to £1.8million in tomorrow’s Budget to try to discourage the over-50s from retiring early.
While the measure will be a boon to younger workers, there are thought to be 1.6million workers who cut or stopped their pension contributions after the allowance was slashed.
Employees near retirement will be unable to make up for the lost years of savings, potentially costing them hundreds of thousands of pounds in pensions tax credits.
Financial experts today blasted ‘hokey-cokey’ rules that have made it impossible to plan for retirement and penalised up to 1.6million savers. The lifetime tax-free allowance is expected to rise from £1.07million to up to £1.8million in tomorrow’s Budget to try to discourage the over-50s from retiring early
Experts said the ‘up-and-down, Grand Old Duke of York’ approach to pensions was unfair to savers and accused the Treasury of ‘messing up’ carefully-laid plans by changing the rules ‘in the middle of the match’.
The lifetime allowance was introduced by Tony Blair’s government in 2006, but it has been whittled down from £1.8million in 2012 to £1.07million.
The change raised around £8billion for the Exchequer but has also driven hundreds of thousands of workers into early retirement, including experienced doctors and GPs penalised for taking on extra shifts.
Tomorrow Chancellor Jeremy Hunt is expected to increase the threshold to between £1.5million and £1.8million, and raise the annual pensions allowance from £40,000 to £60,000.
The change will be the fourth time the threshold has moved in a decade, sparking anger that savers are unable to plan with certainty.
Tory peer Baroness Altmann said: ‘This is a symptom of a system that is not working properly and needs radical reform.
‘It’s a hokey-cokey, up-and-down, Grand Old Duke of York type of approach to pensions – and it isn’t working.
‘We can have an annual allowance – but why punish workers if they do well?’
Former pensions minister Steve Webb, partner at consultancy LCP, said: ‘The biggest injustice is that pensions are supposed to be a long-term business, so you ought to be able to plan with certainty. Instead the rules have kept being changed in the middle of the match.
‘The reality now is that their plans have been messed up and life has been made incredibly complicated for them.’
Gianpaolo Mantini, chartered financial planner and partner at Saltus, said the repeated changes ‘don’t give anyone saving for their retirement peace of mind that they can make plans, and they won’t have the rug pulled out from underneath them’.
Official figures showed the number of doctors taking early retirement from the NHS has more than tripled over the past 13 years.
Doctors, and other public sector workers, on rigid defined-benefit schemes were forced to pay tax on contributions over the £40,000 annual limit, and were then punished when their lifetime allowance breached the limit.
The penalty for drawing from a pension that has breached the lifetime allowance is 25 per cent if taken as income, or 55 per cent if taken as a lump sum.
The British Medical Association says the allowance is ‘punitive’ and argues it has encouraged doctors to leave the profession.
Tomorrow Chancellor Jeremy Hunt (pictured on Sunday) is expected to increase the threshold to between £1.5million and £1.8million, and raise the annual pensions allowance from £40,000 to £60,000
Alice Guy, head of pensions and savings at Interactive Investor, said tax charges were ‘catching out hard working doctors, senior teachers and civil servants and encouraging them to leave the workplace’.
She added: ‘It also has a chilling effect on pension saving, even among those with smaller pots, as many investors worry they could face heavy tax charges in the future if their investments perform well.
‘With more of us living for longer we need to have a generous pension system to encourage people to save enough for a comfortable retirement.’
The yoyo-ing lifetime allowance will also hit pension savers locked out of defined benefit schemes they exited due to fears of hitting the threshold.
Experts said it was unlikely they would be allowed to rejoin the schemes.
Workers who had protection applied to their savings as thresholds came down will be able to remove them to take advantage of the higher limits, they added.
The Treasury said it did not comment on Budget speculation. According to Office for National Statistics figures released today, vacancies across the UK fell for the eighth month in a row. Firms have been holding back on hiring amid woes in the wider economy.
The ONS revealed a 51,000 fall in the number of job vacancies to 1.12million in the three months to February, while the redundancy rate edged higher.
Helen Morrissey, retirement analyst at Hargreaves Lansdowne, said raising the allowances was particularly helpful to those with final salary pension schemes.
But she warned against ‘tinkering around the edges’, saying a full review of the pension system was needed to remove disincentives to work, such as a £4,000 cap on pension contributions for people who go back to work after starting to draw down their pension.
‘The lifetime allowance is not a rich person’s issue any more,’ she said. ‘Because of the way it has been reduced over time, it is now biting on a whole range of people who have long service, particularly where they are in a defined benefit scheme.’
Tory former minister Sir John Redwood added: ‘I have been very worried about the loss of a lot of experienced doctors, who say that taxation of their pensions is one of the big issues driving them out of the profession.
‘This feeds into the growth package because we need to keep more people in their fifties and sixties in work. But I am hoping for a much more comprehensive package to drive growth when we hear from the Chancellor next week.’
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