Financial experts today criticized ‘hokey-cokey’ rules that have made retirement planning impossible and have penalized up to 1.6 million savers.
The lifetime tax-free allowance is expected to rise from £1.07m to £1.8m in today’s budget to try to discourage the over-50s from taking early retirement.
While the measure will be of great help to younger workers, there are believed to be 1.6 million workers who cut or suspended their pension contributions after the allowance was reduced.
Employees about to retire will not be able to make up for lost years of savings, which could cost them hundreds of thousands of pounds in pension tax credits.
Financial experts today criticized ‘hokey-cokey’ rules that have made retirement planning impossible and have penalized up to 1.6 million savers. The lifetime tax-free allowance is expected to rise from £1.07m to £1.8m in tomorrow’s budget to try to discourage the over-50s from taking early retirement (file photo)
Experts said the “ups and downs, Grand Duke of York” approach to pensions was unfair to savers and accused the Treasury of “botching” carefully laid plans by changing the rules “in the middle of the game”.
The lifetime allowance was introduced by the Tony Blair government in 2006, but was reduced from £1.8m in 2012 to £1.07m.
The change raised around £8bn for the Exchequer, but has also sent hundreds of thousands of workers into early retirement, including experienced doctors and GPs penalized for working extra shifts.
Chancellor Jeremy Hunt is expected to raise the threshold to £1.5-1.8m tomorrow, and raise the annual pension from £40,000 to £60,000.
The change will be the fourth time the threshold has been moved in a decade, raising anger that savers cannot plan with certainty.
Conservative colleague Baroness Altmann said: “This is a symptom of a system that is not working properly and needs radical reform.”
‘It’s a Grand Old Duke of York kind of approach to pensions, with ups and downs, and it’s not working.
‘We can have an annual allowance, but why punish workers if they’re doing well?’
Former pensions minister Steve Webb, a partner at consultancy LCP, said: ‘The biggest injustice is that pensions are supposed to be a long-term business, so you should be able to plan for sure. Instead, the rules have kept changing in the middle of the match.
“The reality now is that their plans have gone awry and life has become incredibly difficult for them.”
Gianpaolo Mantini, a chartered financial planner and partner at Saltus, said the repeated changes “don’t give anyone saving for retirement the peace of mind that they can make plans and the rug won’t be pulled out.”
Official figures showed that the number of doctors taking early retirement from the NHS has more than tripled in the last 13 years.
Doctors and other public sector workers, in rigid defined benefit schemes, were forced to pay tax on contributions above the £40,000 annual limit, and were then penalized when their lifetime allowance exceeded the limit.
The penalty for withdrawing from a pension that has exceeded the lifetime allowance is 25 percent if taken as income, or 55 percent 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 today) is expected to raise the threshold to £1.5-1.8m, and raise the annual pension from £40,000 to £60,000.
Alice Guy, head of pensions and savings at Interactive Investor, said the taxes were “trapping up hard-working doctors, teachers and civil servants and encouraging them to leave the workplace.”
He added: ‘It also has a chilling effect on pension savings, even among those with smaller funds, as many investors worry they could face hefty tax charges in the future if their investments do well.
“With more of us living 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 affect pension savers locked out of defined benefit plans who dropped out for fear of reaching the threshold.
Experts said it was unlikely they would be allowed to rejoin the schemes.
Workers whose savings protection was applied as the thresholds were lowered will be able to remove them to take advantage of the higher limits, they added.
The Treasury said it had no comment on the budget speculation. According to figures from the Office for National Statistics released today, vacancies across the UK fell for the eighth consecutive month. Businesses have been holding back on hiring amid troubles in the broader economy.
The ONS revealed a drop of 51,000 in the number of vacant positions to 1.12 million in the three months to February, while the dismissal rate increased.
Helen Morrissey, a retirement analyst at Hargreaves Lansdowne, said increasing allowances was particularly helpful for those on final salary pension plans.
But he warned against “tinkering” and said a complete overhaul of the pension system was needed to remove disincentives to work, such as a £4,000 cap on pension contributions for people returning to work after starting work. withdraw your pension. .
“Lifetime allowance is no longer a rich people’s problem,” he said. “Because of the way it’s been reduced over time, it now affects a whole range of people who have long service, particularly when they’re in a defined benefit plan.”
Former Tory minister Sir John Redwood added: “I have been very concerned by the loss of many experienced doctors, who say that taxes on their pensions are one of the big problems keeping them from the profession.”
‘This feeds into the growth package because we need to keep more people in their 50s and 60s in work. But I look forward to a much more comprehensive package to boost growth when we hear from the Chancellor next week.”