The amount that can be saved into pensions tax-free could be increased as part of efforts to encourage the over-50s to get back to work.
Ministers are considering the change as part of a drive to help millions return to the workplace and end what Jeremy Hunt, the Chancellor, on Friday described as the “enormous and shocking waste of talent and potential” in Britain’s economy.
At present, people have to start paying as much as 55 per cent tax if their pension pot exceeds £1.073 million - meaning many decide it is not worth their while continuing to work once they reach this threshold.
Ministers are understood to be looking at increasing this lifetime allowance to encourage more over-50s to stay on in work.
It comes after Mr Hunt promised a “fundamental programme of reforms” to get as many people into the workplace as possible.
The Chancellor said it was vital to get people back to work if the country was to solve its “productivity puzzle”, as he told those who never returned to work after the pandemic: “Britain needs you.”
Prioritise cutting business tax
Mr Hunt said that around one fifth of working age adults are economically inactive, adding: “Excluding students, that amounts to 6.6 million people. An enormous and shocking waste of talent and potential.”
In an interview with The Telegraph, Mr Hunt also revealed he wanted to prioritise cutting taxes on businesses ahead of cutting taxes for workers.
He told Choppers’ Politics podcast: “If you’re saying to me, ‘do I want to get taxes down?’ - yes, I do. If you’re saying ‘where would I prioritise?’ - my first priority would actually be to bring down business taxes.”
However, Mr Hunt said that the best tax cut we could give the British people would be to halve inflation.
The Chancellor is understood to have told colleagues at Thursday’s Cabinet away day that getting inflation below five per cent this year will be difficult because of the Ukraine war and the Covid pandemic, and because wage growth in the UK was so high.
Mr Hunt also made clear that he now wanted more people back in the office, in a signal that he now opposes the “working from home” culture.
He said: “We need to get back to people being in the office, working as teams, getting all the benefits from being with lots of other people, bouncing ideas off each other, all those watercooler moments. That is a part of life and we need to make sure we get it back.”
Pensions system makes no financial sense
Ministers are concerned that for too many people, the current pensions system means it makes no financial sense to work longer.
The lifetime allowance is the amount that someone can save in total for their pension without incurring a tax charge. It has been frozen at £1.073 million since the 2020/21 tax year, and has almost halved, in nominal terms alone, over the past 11 years.
The deep freeze means that more and more pensioners have been caught out by the rule. Any savings over the limit are taxed at 55 per cent if the money is taken as a lump sum, or at 25 per cent plus the person’s income tax rate if taken out gradually.
It means if someone were to withdraw £100,000 of savings above the threshold at once, it would trigger a £55,000 tax bill.
Untouched pension pots that exceed the lifetime allowance are taxed at 25 per cent above the threshold on the saver’s 75th birthday.
The limit on pension savings has increasingly affected senior doctors in the NHS, with five-figure tax bills forcing many to take early retirement.
Unlike private sector workers, NHS staff cannot control how much is saved in their pension each year, which means the only solution is to reduce their hours.
'Time for programme of reforms'
When it was introduced in 2006, the allowance was £1.5 million. It was raised to £1.8 million in 2010, cut to £1.5 million, then down to £1.25 million and eventually cut to £1 million in 2016 by George Osborne. It rose with inflation until 2021 when it was frozen by then chancellor Rishi Sunak at its current level for five years.
To help to encourage the over-50s to stay in work, ministers are also looking at boosting “mid-life MOTs”, enabling the middle-aged to sit down with a financial adviser to discuss whether it makes financial sense to retire.
They are also considering strengthening conditions on benefits to ensure that work pays - with sanctions for those who can work but refuse to do so.
Speaking at the headquarters of Bloomberg, Mr Hunt said: “Total employment is nearly 300,000 people lower than pre-pandemic, with around one fifth of working age adults economically inactive.
“Excluding students, that amounts to 6.6 million people. An enormous and shocking waste of talent and potential. Of that 6.6 million people, around 1.4 million want to work, but a further five million don’t.
“So it is time for a fundamental programme of reforms to support people with long term conditions or mental illness to overcome the barriers and prejudices that prevent them from working.
“We will never harness the full potential of our country unless we unlock it for each and every one of our citizens. Nor will we fix our productivity puzzle unless everyone who can participate does.
“So to those who retired early after the pandemic or haven’t found the right role after furlough, I say Britain needs you and we will look at the conditions necessary to make work worth your while.”
In total, some 8.9 million people in Britain are not in work despite being of working age - 570,000 more than before the pandemic. The figure includes students, those looking after families such as stay-at-home mothers and carers, the long-term sick and early retirees.
In his interview with The Telegraph, Mr Hunt pledged to publish his tax return covering his years in 11 Downing Street, saying he understood why there was a “particular interest in the Chancellor’s tax affairs”.
Despite the tax row surrounding Nadhim Zahawi, Mr Hunt spoke highly of such businessmen serving in the world of politics, saying: “I do want more entrepreneurs in politics.”
The Chancellor said he would like to see a new Royal Yacht Britannia “in my lifetime”.