Tories Urge Rishi Sunak to Lift Tax on Pension Sizes to Stem Early Retirement Tide

Strategic Insights -

Senior Conservatives have advised Prime Minister Rishi Sunak to reconsider the lifetime pension allowance, which they argue has become a "perverse incentive" for skilled workers, particularly in the NHS, to leave the workforce early. The tax on pension sizes has been reduced from £1.8 million to £1,073,100 over the past decade, and pensioners are typically taxed at 55 per cent on earnings above this threshold. The warning comes as the government attempts to reverse the sharp rise in over-50s retiring since the Covid pandemic, with Mel Stride, the Work and Pensions Secretary, tasked with finding ways to encourage older workers to stay in the workforce.

Key Takeaways:

  • The lifetime allowance currently stands at £1,073,100, having been reduced from a high of £1.8 million in 2006.
  • Pensioners are typically taxed 55 per cent on any earnings they withdraw from their pension pot above the lifetime allowance threshold.
  • One in six doctors has reported planning to retire early due to hitting the allowance limit, exacerbating the labor shortage.
  • Former pensions minister Baroness Altmann has called for the threshold to be scrapped, citing "unintended consequences" such as a creaking health system and longer waits for treatment.
  • The Treasury has frozen the lifetime allowance at its current rate until April 2025 but is open to revising the policy in response to the labor shortages.
  • Work and Pensions Secretary Mel Stride is considering raising the threshold as part of his review into tackling economic inactivity.
  • The tax on pension sizes has been whittled down in recent years as a way for the Treasury to raise more tax revenue from the wealthiest workers.

Statistics:

  • 1 in 6 doctors plan to retire early due to hitting the lifetime allowance limit of £1,073,100 (Source: doctor's survey)
  • The lifetime allowance has been reduced from £1.8 million to £1,073,100 over the past decade (Source: Treasury documents)
  • The tax on pension sizes is currently 55% above the lifetime allowance threshold (Source: HM Revenue & Customs)
  • The Treasury has frozen the lifetime allowance at its current rate until April 2025 (Source: Treasury announcement)

Sources:

  • "The Telegraph" - article by Steve Eve, 20 December 2023.
  • "HM Revenue & Customs" - 2023 tax guide.
  • "Treasury documents" - 2020 report on pension tax reform.
  • "Baroness Altmann" - comments to The Telegraph, 20 December 2023.