Scrap tax-free pension lump sum to end surge in early retirement, urges Labour-linked think tank

Hunt

Jeremy Hunt must dismantle pensions freedoms that allow older workers to access their pension pots aged 55 to stop more of them from retiring early, according to a Labour-leaning think-tank.

The Chancellor has been urged by the Resolution Foundation to raise the age at which people can access tax-free private pension wealth to discourage them from leaving the workforce before the state pension age, which is currently 66 for men and women.

It said the current system, introduced by then-chancellor George Osborne in 2015, “supports early retirement, particularly for wealthier individuals” because people are allowed to take their money in lump sums, regular or occasional income payments or a combination of these options.

Before April 2015, most people used their defined contribution pension savings to buy an annuity.

The think-tank, which is run by Torsten Bell, Ed Miliband's former director of policy, urged Mr Hunt to “consider further raising this age, or at least slowing the rate at which money can be withdrawn before the state pension age (SPA)”.

Sir Keir Starmer, the Labour leader, has not set out a position on pensions reform and sources in the party declined to comment on the proposal.

The Resolution Foundation also called for a shake-up of the current system that allows people to take 25pc of their pension pots as a tax-free lump sum, which costs the taxpayer £5.5bn a year.

It said: “This encourages early retirements far before the SPA for wealthy individuals, at considerable expense to the taxpayer”. The organization said the Treasury should cap the tax-free amount.

The Foundation also warned against blithely raising the state pension age more quickly to fix Britain's shrinking workforce problem and bring more tax receipts into the Exchequer as people work longer.

The current state pension age is set to rise to 68 by 2046. The Government wants this to happen by 2039, but ministers are currently considering an even earlier timetable.

Economists Louise Murphy and Gregory Thwaites  said: “While doing so would bring fiscal benefits in the long-term, it would also bring significant consequences for inequality since life expectancies vary hugely between rich and poor people, and life expectancy is looking worse – not better – than expected a decade ago.”

Sir Steve Webb, a former pensions minister, said the Foundation's recommendations followed the “wrong logic” and were not based on evidence.

He said limiting access to pension pots would punish savers who had voluntarily locked their money away in defined contribution pensions that rely on stock market returns rather than career average or final salary guarantees.

Sir Steve said that many people had used the money to pay off expensive debts and added: “It is stopping people using their own money in the way that benefits them the best.

“These people have saved voluntarily, because if you're 55, and you got a pension pot, this was the era where people chose to sacrifice their living standards and put money aside. These are not the spendthrift generation who then go and blow it all on riotous living.”

Sir Steve also highlighted that many people who retired early, including civil servants and doctors would not be affected by a pension shake-up because they would only apply to defined contribution pensions, and not defined benefit schemes.

The Resolution Foundation also warned against a “misguided” drive to try to get those who took early retirement during the pandemic back into work. It said the focus should be on encouraging mums, older workers and people with disabilities to seek work.

Economic inactivity among all adults has risen by 830,000 since the start of the pandemic, with three-quarters of the rise concentrated among those aged 50 and over.

The foundation said many of the older workers who had recently retired are “unlikely to ever come back to the workforce”.
Mel Stride, the Work and Pensions Secretary, is currently carrying out a review of how to get over-50s back into employment.

Last month, he said Government interventions to boost workforce participation will focus on the over-50s, carers and the long-term sick and disabled.