Labour has been accused of exaggerating the benefits for the well off stemming from chancellor Jeremy Hunt’s Budget move to scrap the £1.1mn lifetime allowance on tax-free pension contributions.
Shadow chancellor Rachel Reeves vowed to reverse Hunt’s decision to abolish the lifetime allowance, which he justified on the grounds it would incentivise older workers to stay in their jobs, notably NHS doctors and consultants.
Labour said in a press release on Thursday that ending the lifetime allowance “could see the richest one per cent of those accessing their pensions next year net an average of £45,000”.
It went on to say that “people with more than £1.4mn in their pension pot are able to pay up to £150,000 less in tax”.
However, experts said this example by Labour, explained in a footnote in its press release, exaggerated the available tax savings for the well off.
David Robbins, director at WTW, a professional services firm, calculated the tax saving for someone with a £1.4mn pot will be “less than one-third as big as [Labour] say”.
He added that in making its calculation, it appeared Labour had applied “the wrong change in tax rate to the wrong part of the pension pot”.
Instead of the tax savings being £150,000 it would be in the region of £29,000 to £47,000, Robbins said.
Kay Ingram, a chartered financial planner, said Labour in its press release “seems to exaggerate the tax saving for the individual”.
“It’s a pity that the opposition has chosen to attack this proposed change, without coming up with an alternative way for removing unexpected tax bills and the disincentive to stay in work, which the current tax regime has created,” she added.
Labour, which on Thursday said it would seek to keep doctors in work by creating a targeted scheme dealing with their pension issues, refused to comment on the apparent error in its press release.
But it tacitly accepted a mistake by saying on Friday that it was now using a different example from the Resolution Foundation, a think-tank, suggesting someone with a £2mn pension pot would secure a tax saving of almost £250,000.
The apparent error in Labour’s press release follows days of confusion about the nuances of complicated pension tax rules, and how people might be affected by proposals set out by the government and Labour.
Chris Etherington, partner at RSM, an accounting firm, said Labour’s calculation of a supposed £150,000 tax saving looked like it was “based on a muddled understanding of how the pension tax rules operate”.
He added it was difficult to see how the Resolution Foundation had calculated its figures.
As well as scrapping the lifetime allowance, Hunt proposed increasing the annual tax-free pension contributions limit from £40,000 to £60,000, and the Budget documents estimated his proposals would cost the government £1.1bn by 2028.
The Office for Budget Responsibility, the fiscal watchdog, has estimated the proposals could lead to 15,000 people returning to work.
But Nimesh Shah, chief executive of Blick Rothenberg, another accounting firm, said Labour’s knee-jerk reaction to Hunt’s Budget announcement was “not helpful” as it would significantly affect taxpayer behaviour in the run-up to the next election.
“It could even mean people significantly over-contributing to their pensions in this window to lock-in the benefit now, as Labour would need to introduce another form of fixed protection if they follow through with this,” he added.