The Telegraph has learned that the lifetime pension is to be frozen for two more years, with a rate increase delayed from 2025 to 2027. This means two million savers now face tax charges of up to 55% on their pension funds by the end of this period, according to expert analysis. The approach comes with the future of the pension triple lock, which guarantees state pensions will rise by 2.5 per cent, while earnings or inflation – whichever is higher – still hangs in the balance. The prolonged freeze is expected to hit private sector savers more than public sector workers, as the Treasury’s lifetime allowance calculations are more generous for the latter group. There are signs of discontent in the Tory backbenches that the government is disproportionately targeting savers as it tries to reduce borrowing through spending cuts and tax rises. The Telegraph revealed on Friday how the Treasury is considering increasing tax rates and capital gains allowances, prompting some criticism from Tory supporters. Since the Tories entered Downing Street in 2010, pressures on pension tax relief have been the second biggest source of rising tax burdens, according to the Institute for Fiscal Studies. It has also emerged that electric vehicles are to be charged VAT for the first time. But on Friday, No 10 promised Sizewell C nuclear power station, in Suffolk, would still be funded after reports it was in the Treasury’s crosshairs.
“Madhouse Economy”
Baroness Altman, who was Tory pensions minister under David Cameron, said further freezing the lifetime allowance could inadvertently encourage public sector workers to take early retirement. He said: “People in the NHS and other parts of the public sector will increasingly be driven into early retirement, rather than working longer as we need them to. “This is because tax rules that were intended to be a workplace benefit are being turned into a workplace penalty. This is the madhouse economy.” Mr Sunak and Mr Hunt must fill a budget black hole of around £50bn in the autumn statement on 17 November. They agreed to split the cost roughly equally between spending cuts and tax increases. Treasury sources have clarified the broad approach to The Telegraph. The prime minister and chancellor do not want to break the promises of the Tories’ 2019 election manifesto or increase the rates of big taxes. They are also determined to ensure that the wealthy bear more of the burden of tax rises than the poorest – and they want this to be clear in the impact assessments of their measures. It means much of their focus has fallen on changing tax thresholds – when people start paying certain taxes – and allowances – the amounts people can earn tax-free. The lifetime pension is £1,073,100. Savings above this limit are taxed at 55 per cent if the money is taken as a lump sum, or at 25 per cent plus your income tax rate if paid in stages. It means that £100,000 of savings over the limit withdrawn straight away would trigger £55,000 of tax. Untouched pensions in excess of the lifetime allowance are taxed at 25 per cent above the limit on the saver’s 75th birthday. In the past, the level of the allowance has risen with prices – meaning savers don’t lose out if inflation soars, as it is today. But last year, as chancellor, Mr Sunak froze the allowance until 2025. The move was expected to take the Treasury close to a billion pounds over the period because as prices rise, people’s savings exceed the allowance, leading to new tax bills. The Treasury Department is preparing to announce that the freeze will be extended until 2027, the end of the five-year period for which plans will be drawn up. Such a change is often called a “stealth tax” because it results in more people paying tax, even though the overall tax rate does not increase.
