More generous tax-free pensions allowances in the Budget have been described by Labour leader Sir Keir Starmer as a “permanent tax cut” for the wealthy.
Going beyond expectations, Chancellor Jeremy Hunt announced he is scrapping the lifetime allowance in a move which aims to remove disincentives to working for longer.
People will usually pay tax if their pension pots are worth more than the lifetime allowance.
The lifetime allowance has stood at £1.07 million, with people potentially incurring tax charges as high as 55% on pension savings above this.
Mr Hunt also unveiled an increase in the annual pension allowance – the limit on how much money someone can build up in their pension in any one tax year while still benefiting from tax relief – from £40,000 to £60,000.
Some pensions experts pointed out that millions of workplace pension savers will feel no impact from the measures.
The reforms have been strongly welcomed by some within the NHS, who said they could help to retain experienced senior staff who are playing a critical role in healthcare.
“The only permanent tax cut in the Budget is for the richest 1%. How can that possibly be a priority for this Government?
“The truth is our labour market is the cast-iron example of an economy with weak foundations. Our crisis in participation simply hasn’t happened elsewhere, not to this extent; it is a feature of Tory Britain and global excuses simply won’t wash.”
According to figures on HM Revenue and Customs’ website, in 2020 to 2021 8,610 lifetime allowance charges were reported by schemes.
James Kirkup, director of the Social Market Foundation, said: “Abolishing the lifetime allowance will cost the Treasury around £2.75 billion over five years while benefiting only the small group of workers fortunate enough to have pension pots worth more than £1 million.
“Most of those workers are doctors, so this might help with NHS staff retention, but it’s a lot of money to allocate to a small number of people with huge pensions.”
Tom Selby, head of retirement policy at AJ Bell, said: “Jeremy Hunt has unveiled a pensions tax-cutting bonanza far beyond anyone’s pre-Budget expectations and the most significant retirement policy intervention since the 2015 pension freedoms.
“The lifetime allowance has long acted as a drag anchor on strong investment performance and a deterrent to retirement saving while also creating horrendous complexity in the system.
“It has also added to the huge turmoil engulfing the NHS, with senior doctors choosing early retirement over paying a pension tax penalty.”
She said: “For some, it has also been a deterrent for remaining in the workforce later in life and continuing to build a pot for retirement, and abolishing the LTA (lifetime allowance) removes this potential barrier.”
Phil Brown, director of policy for People’s Partnership, provider of the People’s Pension, said the changes will not have an impact on the vast majority of pension savers.
He said: “At a time when the NHS is facing significant challenges, any measure that encourages valued and experienced doctors to continue working is to be welcomed, but today’s announcement on the lifetime allowance and annual allowance will do nothing to solve the problem of under-saving in the UK.
“These changes to the pension allowances won’t impact the vast majority of hard-working savers and means very little to the millions of people who save through automatic enrolment. Reform to workplace saving will be the only way to ensure that millions more people can save enough to live on in retirement.”
“This has been a longstanding concern for trusts and we have been urging the Government to take decisive steps.
“For far too long, a series of temporary quick fixes has failed to stem the flow of senior NHS staff either taking early retirement or not taking on extra work for fear of punitive tax bills.
“Today’s removal of the lifetime allowance will help keep highly valued, experienced senior NHS staff – who play a critical role in delivering and directing patient care as well as training and developing the next generation of the workforce – within the health service.
“The increase to the annual allowance threshold will also mean that far fewer senior NHS staff will be hit with large in-year tax bills.
“At a time when the Government is seeking to get more people back into work, including those who are unable to do so because of health conditions and record care backlogs, the value of retaining highly skilled staff cannot be under-estimated.”