A multibillion-pound tax break to stop an estimated 15,000 high earners leaving the workforce has been criticised by Sir Keir Starmer as a “huge giveaway to some of the very wealthiest”.
Going far beyond expectations, Chancellor Jeremy Hunt used his Budget on Wednesday to announce the abolition of the lifetime pensions allowance which stood at £1.07 million.
The combined cost of the policies will be more than £1.1 billion a year by 2027/28, according to official estimates.
The reforms were welcomed within the NHS as a boost to help retain experienced staff but experts pointed out that millions of savers will feel no impact from the measures.
Paul Johnson, the director of the Institute for Fiscal Studies think tank, said the change would “encourage a relatively small number of better-off workers to stay in the workforce a bit longer”.
“These pension tax changes are unlikely to have a big effect on overall employment,” he added.
Economists at the Resolution Foundation warned the pensions giveaway may actually cause some workers to retire early or use “their now uncapped pensions saving to avoid inheritance tax”.
Chief executive Torsten Bell said the measures are “hugely regressive and wasteful”, adding: “It’s a big victory for NHS consultants but poor value for money for Britain.”
Sir Keir, the Labour leader, described the move as a tax cut “for the richest 1%”.
“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.”
The Office for Budget Responsibility (OBR) financial watchdog estimated that the two policies will increase employment by 15,000 workers.
Mr Hunt described the move as a bid to prevent doctors from retiring early but Treasury officials were unable to say what proportion of the jobs would be medics in the NHS.
A 2019 survey for the Royal College of Surgeons, that suggested 69% of consultant surgeons had reduced their hours due to pension taxation rules, was pointed to.
People will usually pay tax if their pension pots are worth more than the lifetime allowance, with people potentially incurring tax charges as high as 55% on pension savings above this.
But Mr Hunt abolished the tax, arguing “Conservatives believe work is a virtue” as he seeks to reduce the number of working-age adults without jobs with measures to encourage retirees back into the workplace.
He also unveiled an increase in the pensions 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.
Mr Hunt told MPs he does “not want any doctor to retire early” because of pension rules, adding: “No one should be pushed out of the workforce for tax reasons.”
“These changes will stop over 80% of NHS doctors from receiving a tax charge, incentivise our most experienced and productive workers to stay in work for longer and simplify our tax system, taking thousands of people out of the complexity of pension tax,” he said.
According to figures on HM Revenue and Customs’ website, 8,610 lifetime allowance charges were reported by schemes in 2020 to 2021.
The change was welcomed by some in the health service, including by the NHS Providers membership organisation.
Chief executive Sir Julian Hartley said the policies were needed 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,” he said.
“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.”
But 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.”
James Kirkup, director of the Social Market Foundation, added: “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.”