Spring Budget and The Great Retirement

FORE! possibilities for the forthcoming Spring Budget.

Many years ago, I had six golfing lessons with the club professional at our local course. I think they’ve just about repaired the ground that I practiced my drive on.

If anything, the lessons taught me that my hand-eye coordination was practically non-existent, which explains why you don’t now see me walking up the final 18th hole fairway, battling for first place against Rory McIlroy.

And yet golfers in their 50s and early 60s have recently been the focus of attention for the Chancellor, Jeremy Hunt; in particular, those individuals who have supposedly decided to swap their work shoes for golf shoes during the pandemic, in what has been described by some commentators as ‘The Great Retirement’.

When the Chancellor delivered a speech recently, he said, “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”.

Both the Chancellor and the Secretary of State for Work and Pensions, Mel Stride, are therefore focusing their attention on those aged over 50 who stopped working during the Covid pandemic and have not returned to employment since.

Increasing the Lifetime Allowance?

The problem for the government is that the continued absence of this cohort from the workplace will not help improve the UK’s post-pandemic productivity, and so ways of encouraging the over-50s back to work may well feature in the forthcoming Spring Budget on 15 March.

One of these ways could be to increase the Lifetime Allowance (LTA) for those aged over 50.

The LTA represents a ceiling on how much an individual can save in their pension during their lifetime. Any excess above that amount is subject to a tax charge of up to 55%. 

The LTA currently stands at £1.073m and is due to stay at that amount until 2026.

Offering those aged over 50 a higher LTA, (or less punitive tax charges for any excess amounts accumulated), may tempt those who currently prefer playing golf, or visiting garden centres, to consider returning to the workplace.

What else might the Chancellor reveal on Budget Day, where pensions are concerned?

There is certainly no shortage of suggestions being put forward by certain ‘think-tanks’; in particular, the Institute for Fiscal Studies (IFS) and the Resolution Foundation.

The IFS report, A blueprint for a better tax treatment of pensions, outlines proposals to “even out” tax support for pension saving, stating that the reforms outlined in its report would boost the retirement incomes of the bottom 80% of earners, while providing greater encouragement for them to save more into a pension, and removing “overly generous subsidies” that benefit those on high incomes. 

Examples of their proposals include reforming the 25% tax-free lump sum to provide a more equal subsidy to all private pensions, extending up-front employee National Insurance Contributions (NICs) relief to all pension contributions and levy employee NICs on pension income withdrawals instead, and proposing a new LTA on contributions to defined contribution pensions and on benefits from defined benefit pensions.

In comparison, the Resolution Foundation report, Post-pandemic participation — exploring labour force participation in the UK, the think-tank argues that the government should clamp down on the ‘pension freedoms’ that encourage wealthy people to retire early. 

While exploring the reasons behind the current “economic inactivity” of the over-50s, the report outlines a series of measures to tackle it, arguing that increased departures from the labour market during the pandemic were typically higher-paid professionals, while moves from employment into retirement from low-paying occupations fell. 

They anticipate that the Spring Budget will include proposals to boost labour force participation, including helping older workers and those with a disability to stay in work, and improving childcare support to help mothers (back) into employment. 

Reforming the Money Purchase Annual Allowance

Another reform that is long overdue and may serve to keep older workers within the labour market is to either increase - or scrap altogether - the Money Purchase Annual Allowance (MPAA).

Once triggered, the MPAA reduces the maximum contribution that an individual (and their employer) can pay into their defined contribution (or ‘money purchase’) pension scheme to just £4,000 gross per year.

By comparison, the ‘standard’ annual allowance is currently £40,000 gross per year.

The MPAA is triggered when an individual aged 55 and over draws taxable income from their defined contribution pension; a trend which has been exacerbated in recent times with soaring inflation and the cost-of-living crisis.

If the government is aiming to get older people back into work, retaining such a low savings-ceiling restricts their ability to either build - or rebuild - their pension.

The Great Retirement or The Great Sickness?

In conjuring up ways to tempt ‘the great retired’ back to work, however, new research suggests that individuals are not proactively retiring from the workplace to immerse themselves in hobbies and holidays, but instead are unable to work, due to long-term ill health conditions. 

Indeed, the former Pensions Minister, Steve Webb, asked if this is “The Great Retirement or The Great Sickness?” and whether “the government is at risk of ‘barking up the wrong tree’ on the rise in economic inactivity?”

Are the non-working over-50s suffering from illnesses that are directly or indirectly attributable to the pandemic, and potentially made worse by the problems being experienced in the NHS?

Rather than forcing people back to work when unwell, therefore, Budget proposals should be focused around discovering why flows into long-term sickness have grown and facilitating early intervention to prevent an individual’s health from deteriorating.

In conclusion, the possibilities available to the Chancellor - where tackling economic inactivity is concerned - are both numerous and multi-faceted. When he decides which club to pick from his Treasury golf-bag on Budget Day, however, he needs to ensure that his drive to economic recovery delivers a hole-in-one and not a triple-bogey.