Higher taxation on pension pots could come into force as the Government makes up for a change in Britain’s labour following the pandemic, a senior economist has warned.
A rise in people retiring at 50 and not returning to their workplace post-pandemic could result in retirees’ saving being taxed more.
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Ian Stewart, Deloitte's chief economist in the UK, analysed employment and immigration trends and warned that because "Britain’s labour has seen significant and unexpected change since 2020", there may be actions taken by government to make up for the loss of productivity.
He said: "The relatively high levels of personal wealth enjoyed by the over-50s could face increased levels of taxation and a further increase in the age at which the state pension becomes payable."
Pension savings could be taxed more following a surge in people retiring after the pandemic
Anthony Devlin
According to data from the Office for National statistics, there has been a surge in the number of people retiring early which has shrunk the workforce.
Increasing levels of migration from outside the EU has also partially offset the ending of unskilled migration from the EU.
While the pandemic has caused an increase of hybrid and home working.
Stewart said: "More people are in work today than on the eve of the pandemic in most industrialised countries, though not in Britain. Its workforce has shrunk, mainly because of a rising number of people of working age withdrawing from the workforce."
Around 575,000 people have left work since the onset of the pandemic, equivalent to almost 2 per cent of the workforce.
He said: "Retirement has surged among the 50- to 64-year-olds, most of whom own their own homes outright and have pensions and other savings. The pandemic has caused many people to re-evaluate their priorities and, for some, led them to opt for early retirement.
"In the UK, private pensions and the option to take 25 per cent of pensions as a tax-free lump sum provide more flexibility over the timing of retirement than in much of the rest of Europe where state provision plays a larger role."
Last month, chancellor Jeremy Hunt set out his “Four E’s for Economic Growth” which included a focus on employment and the lack of older, skilled workers.
His speech prompted reports that he was considering a change to pension tax rules which might make it punitive for older workers to return to work.
Concerns over new tax rules grew after Jeremy Hunt announced his growth plans
Joe Giddens
Other options could include “positive tax changes” designed to encourage the over 55s to get back to work.
Steven Cameron, pensions director at Aegon said: "With economic inactivity amongst over 50s worryingly high, we support any measures the Government can make to encourage this group to return to work. This would be positive not just for economic growth but for the finances of these individuals in their later life.
“As part of this, pension tax rules that need to be overhauled include the lifetime allowance, the annual allowance and the little known Money Purchase Annual Allowance."
