Yahoo Finance Lift pension tax rules to stop early retirement surge, Rishi Sunak told
Rishi Sunak has been urged to lift “bonkers” tax rules on the size of pensions to stem the tide of over-50s retiring early.
Senior Tories have said the Prime Minister should increase or even scrap the lifetime allowance because it acts as a “perverse incentive” to quit.
Number 10 is attempting to reverse a sharp rise in the number of older people choosing to leave the workforce since the Covid pandemic.
Mel Stride, the Work and Pensions Secretary, has been told to come up with ways to incentivise over-50s to stay in and return to their jobs.
The lifetime allowance currently stands at £1,073,100, having been reduced from a high of £1.8 million just over a decade ago. Pensioners are typically taxed 55 per cent on any earnings they withdraw from their pension pot above that amount.
The threshold was introduced by Tony Blair’s government in 2006, at which point it stood at £1.5 million. It has been whittled down in recent years as a way for the Treasury to raise more tax revenue from the wealthiest workers.
But ministers have been warned that the tax is now encouraging skilled people, especially in the NHS, to quit the workforce. One in six doctors told a recent survey they planned to retire early because they had hit the allowance limit.
Damian Green, a former work and pensions secretary, said Mr Sunak should review the rules in light of the growing labour shortages, adding: “The lifetime allowance has been a perverse incentive encouraging professionals to retire early just when we need their skills.”
Baroness Altmann, a former pensions minister, said the threshold was an “ill-thought out” policy, costing more than it brings in for the Exchequer. She said it should be scrapped at the very least for critical workers, such as those in the health service, who cannot be easily replaced.
“The unintended consequences are now really coming home to roost,” the Conservative peer told The Telegraph. “It’s driving away the most valuable people in their 50s. They’re frightened of a regime that punishes them if they build up their pension.
“We’ve got this lack of joined-up thinking where a workplace benefit is turning into a workplace penalty for the most valuable senior staff.”
Baroness Altmann said the “knock-on effect” of doctors retiring early was a creaking health system and longer waits for treatment. She added that this in turn led to delays in getting people with illnesses back into the workforce, exacerbating the labour shortage.
Earlier this year, the Treasury announced that the lifetime allowance was being frozen at its current rate until April 2025. But it is understood that Mr Stride is considering the idea that it should be raised as part of his review into tackling economic inactivity.
Treasury sources did not dismiss the prospect outright, saying they would wait to see his report, which will be delivered in the New Year.
