Chancellor Jeremy Hunt has been warned his multi-billion pound pensions giveaway may not increase the number of people in work at all and could open an inheritance tax loophole.
Economists also said on Thursday that households will feel “continuing pain” over the next year as earnings fail to catch up with high prices during a “lost decade” of living standards.
Mr Hunt used his Budget to abolish the tax-free cap on the lifetime pensions allowance, as he seeks to boost economic growth by decreasing the number of working-age adults opting to retire.
But Labour said it will reverse the “pensions bung for the 1%” if it wins power, as the Institute for Fiscal Studies said it could cost up to £100,000 per worker kept on.
Paul Johnson, the think tank’s director, said removing the cap on the allowance standing at £1.07 million “won’t play a big part, if any, in increasing the number of people in work”.
The Office for Budget Responsibility (OBR) watchdog has estimated the policy could increase the workforce by 15,000 people.
However, Mr Johnson described the assumption as “optimistic” and and said it was disappointing that “over-generous aspects” of pension taxation were not being reined in, “not least complete freedom from inheritance tax”.
Mr Johnson was unable to say whether the policy would favour wealthy bankers over medics, but added: “I do think that if the fundamental problem it was trying to address was doctors, then it was a rather large sledgehammer to crack a very small nut, and a billion pound sledgehammer at that.”
Isaac Delestre, an IFS taxation researcher, added that some may “even end up retiring earlier” thanks to the policy because they will need to put away less to reach their savings goal.
He said those who will benefit are those with the ability to “build up very large pension pots” or who can contribute more than £40,000 a year to their pensions.
“Pension pots are entirely exempt from inheritance tax so those are additional subsidies that are going to be handed out to people making very large savings under these reforms,” he added.
Economists at the Resolution Foundation also warned that the “unneeded tax break for wealthy pension savers” could see some workers choosing to retire early or using their now uncapped pensions savings to avoid inheritance tax.
Torsten Bell, the think tank’s chief executive, said: “It’s a big victory for NHS consultants but poor value for money for Britain.”
In the IFS’s assessment, Mr Johnson said projections suggest disposable incomes will be barely higher in 2027 than in 2017 in what he described as a “lost decade for living standards”.
“Finally, what households are going to feel over the next year will be continuing pain. Inflation may be coming down, but prices remain much higher than two years ago. Earnings haven’t caught up,” he said.
Labour vowed to “reverse” the abolition of the tax-free cap on the lifetime pensions allowance if it wins the next general election, and replace it with a scheme targeted at doctors rather than a “free-for-all for the wealthy few”.
Shadow chancellor Rachel Reeves said: “The Budget was a chance for the Government to unlock Britain’s promise and potential. But the only surprise was a £1 billion pensions bung for the 1%, a move that will widen the cost-of-living chasm.
“At a time when families across the country face rising bills, higher costs and frozen wages, this gilded giveaway is the wrong priority, at the wrong time, for the wrong people.”
Mr Hunt was defending the move, forecast to cost £2.75 billion over the next five years, as needed to boost economic growth by easing labour shortages.
He told Times Radio it was “rather bizarre” to say his Budget had been aimed at the wealthiest 1%, as he cited his energy price guarantee extension and fuel duty freeze.
The cost-of-living support package “dwarfs any of the other single measures that we’ve done”, he said on BBC Radio 4’s Today programme, but he could not say how many doctors would be encouraged to return to work or take on extra hours thanks to the pensions changes.
“It is impossible to know the exact number,” he said.
Mr Hunt defended not limiting the move to doctors, telling BBC Breakfast: “The other options, if we had a scheme that was just for doctors, it would actually be more aggressive because what we’ve announced doesn’t help the very wealthiest doctors.
“The NHS at the moment spends about £3 billion a year paying for locum doctors and agency nurses because of these staffing shortfalls. This will help to reduce that, it will free up more resources.”
Harriett Baldwin, Conservative chairwoman of the Commons Treasury Committee, told a Resolution Foundation event she was “very surprised” that the abolition of the cap on the lifetime pensions allowance had not been limited to NHS schemes, as she had expected.
Meanwhile, trade unions said Mr Hunt had found £6 billion to freeze fuel duty again while refusing to come up with additional money for public sector workers seeking cost-of-living pay rises.
There was unhappiness among some Conservative MPs too at his decision to press ahead with a planned rise in corporation tax, from 19% to 25%, although he softened the blow with a three-year temporary break allowing investment in plant and machinery to be written off against tax.
Mr Hunt said it will make the UK the “most attractive investment environment in the world” for the next three years and that he is committed to making it permanent as soon as he can.
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