The increase in pension benefits in Wednesday’s budget could be instrumental in keeping some groups in the workforce, but will not solve the health problems that keep people out, commentators said.
The Chancellor is understood to be considering an increase in the Lifetime Pension Allowance (LTA), which could help support a wider ambition to encourage older workers back into the workforce to help the UK’s shrinking workforce.
The PA news agency understands that Jeremy Hunt is considering allowing workers to put more money into their pension fund before it is taxed as part of his budget package.
Baroness Ros Altmann, former Pensions Secretary, said: “Focusing on changing pensions and benefits will not solve the health problems that keep the over-50s out of work.
The lifetime allowance and, in particular, the annual allowance are poorly designed and in need of reform
Carl Emmerson, IFS
“The chancellor is right to consider whether increasing pension benefits or tightening benefit assessments would lead to more over-50s re-entering or staying in the workforce.
“However, the evidence clearly shows that this will not be enough.”
He said some people “are just not well enough to continue working, especially full-time, because of health problems. Post-Covid increases in NHS backlogs, as well as reduced services, are likely to mean more older people will remain in poor health while waiting for treatment.
“This will continue to keep them out of work and, if they’ve already left a job, make it much harder to get back into the workforce.”
Mr Hunt wants to boost Britain’s workforce as he tries to deliver on the Prime Minister’s pledge to grow Britain’s lagging economy.
The lifetime allowance is £1.07m, with savers subject to tax after this personal pension limit is exceeded.
Reports differ on how much Mr Hunt could raise the LTA in his budget statement.
The Times newspaper said the chancellor would increase it to £1.8m, while the Daily Telegraph said it could be set at more than £1.5m.
It is also understood that the Budget could see the annual rate of pension compensation rise, with Mr Hunt having instructed his advisers to work out how much a change would cost the Exchequer.
After years of cuts and stagnation, this would breathe new life into people’s retirement planning and could help groups such as senior NHS consultants stay in the workforce
Helen Morrissey, Hargreaves Lansdowne
Reports suggest that the amount each person can save each year before tax is likely to rise from £40,000 to £60,000.
Carl Emmerson, deputy director of the Institute for Fiscal Studies (IFS), said: “The lifetime allowance, and in particular the annual allowance, is badly designed and in need of reform.
“The annual allowance hurts those who want to make large but infrequent pension contributions and can provide tremendous incentives for high earners on rigid defined benefit arrangements.
“Both have been cut dramatically since 2010, raising the fund by around £8bn a year in additional income.
“Raising them will reduce the damage they do, but even better would be a more comprehensive reform of the way pensions are taxed.
“High earners with large pensions benefit from inappropriately generous tax treatment of pensions, but there are much better ways of limiting this than these crude caps.”
Helen Morrissey, head of pensions analysis at Hargreaves Lansdown, said: “Speculation has now reached fever pitch that we are going to see huge increases in lifetime allowances, and possibly annual allowances, in tomorrow’s Budget.
“After years of cuts and stagnation, this would breathe new life into people’s retirement planning and could help groups such as senior NHS consultants stay in the workforce.
“So far, there is no word on whether such changes will be part of a comprehensive overhaul of the pensions tax system, which has become large, cumbersome and complex.”
Speaking to Bloomberg earlier this year, Mr Hunt promised to look at fiscal measures to help over-50s who had taken early retirement during or after Covid-19 get back to work.
The British Medical Association (BMA) branded the current LTA rate “punitive” and argued it encouraged doctors to leave the profession.
The lifetime allowance was first implemented in 2006, when it was set at £1.5m.
It peaked at £1.8m by 2012 before gradually declining.
It was due to remain at £1.07m until 2026, but Mr Hunt could opt to bring a change forward.
Alice Guy, head of pensions and savings at interactive investor, said: “The lifetime allowance at its current level is becoming increasingly difficult to justify and is incompatible with the government’s aim to support older workers.”
He said the tax burdens “catch hard-working doctors, senior lecturers and civil servants and encourage them to leave the workplace.
“It is also having a chilling effect on pension savings, even among those with smaller sums, as many investors worry they could face heavy tax burdens in the future if their investments perform well.
“As more of us live longer, we need to have a generous pension system that encourages people to save enough for a comfortable retirement.”
The Treasury said it does not comment on budget speculation.
UK job vacancies fell for the eighth consecutive month, according to Office for National Statistics (ONS) data released on Tuesday. Companies have delayed hiring amid woes in the broader economy.
The ONS revealed a 51,000 fall in the number of job vacancies to 1.12 million in the quarter to February, while the jobless rate rose.
Lily Megson, director of policy at My Pension Expert, said: “The Budget should include plans to ensure more people have access to the information and advice they need to make informed decisions, putting them in control of their pensions plans”.