Rachel Reeves is gaining a reputation as a major pension thief. Her doom-laden rhetoric about the dire state of public finances has allowed a harmful narrative to take root that she intends to plunder the savings of those considered “rich.”
Absurdly, Labor sees this person as someone on moderately good earnings, paying a higher rate of tax, and as having sensibly saved up for their old age.
We don't know yet exactly what she has planned in her budget at the end of the month. However, it allowed an atmosphere of fear to build up and a cauldron of speculation about attacks on pensions.
Reports show that she has backed away from the idea of cutting tax breaks on contributions for higher rate taxpayers due to the harmful impact of the change on public sector workers. Reeves is also understood to have abandoned plans to reimpose a lifetime pension cap, also because of the adverse impact on some wealthier public sector professionals.
Now he is considering a new approach: reducing the amount that can be considered a tax-free lump sum.
Retirement raid: Rachel Reeves is considering reducing the amount that can be considered a tax-free lump sum
You can currently use up to 25 per cent of your pension pot as tax-free funds, up to a maximum of £268,275. Reeves is said to be considering cutting rates to £100,000 – a move recommended by the increasingly active and assertive Institute for Fiscal Studies (IFS).
The concession costs around £5.5 billion a year, with most of the benefits going to the relatively wealthy.
Lowering the cap to £100,000 would theoretically raise around £2 billion a year in the long term, says the IFS.
However, by reducing the attractiveness of a tax-free lump sum, people are likely to change their behavior by paying less into their pension fund or retiring earlier than they intended.
Reducing the tax-free allowance would also be grotesquely unfair to those who have included it in their retirement plans.
This would amount to retroactive taxation, which is frowned upon by economists because it undermines confidence in the fairness of the system.
The Chancellor could try to soften the blow by introducing a transition period, but this would be complicated.
If it goes any further, savers will rightly feel cheated and tricked into contributing to a pension fund under false pretenses. Confronting people who have worked and saved for years with a vindictive financial blow is not the way to win hearts and minds.
In human terms, this means giving up on travel dreams, thwarting plans to pay off the mortgage, and giving up on hopes of helping children and grandchildren.
The best chance that Reeves will decide to abandon this unwise course of action is the realization that, like other thefts she has considered, it will harm her beloved public sector workers. The IFS says it would affect about half of them and one fifth overall.
Doctors' unions are already threatening exodus. Since Reeves seems to only care about public sector workers, this may prompt her to back off.
Her prejudices are offensive to people working in the private sector, which generates the wealth and tax revenues that support the NHS and other public services, as well as their pensions.
But let's hope he thinks again, whatever the reason.
DIY INVESTMENT PLATFORMS
Affiliate links: If you purchase a This is Money product, we may earn a commission. These offers are selected by our editorial staff because we believe they are worth highlighting. This does not affect our editorial independence.
Compare the best investment account for you
Share or comment on this article: RUTH SUNDERLAND: Chancellor is gaining a reputation as a pension thief
Some links in this article may be affiliate links. If you click on them, we may receive a small commission. This helps us fund This Is Money and keep you free to enjoy it. We do not write articles promoting products. We do not allow any commercial relationships to influence our editorial independence.
