Labor is accused of exaggerating the tax benefits of Jeremy Hunt’s pension reform

Labor has been accused of exaggerating the benefits to the wealthy of Chancellor Jeremy Hunt’s budget move to scrap the £1.1m lifetime allowance for tax-free pension contributions.

Shadow Chancellor Rachel Reeves pledged to reverse Hunt’s decision to end the lifetime allowance, which he justified as it would encourage older workers, particularly NHS doctors and consultants, to stay in their jobs.

Labor said in a press release on Thursday that by ending the lifetime allowance, “the richest one percent of those with net access to their pensions over the next year could receive an average of £45,000”.

It goes on to say that “people with more than £1.4m in their pension pot can pay up to £150,000 less in tax”.

But experts said Labour’s example, explained in a footnote to its press release, exaggerates the available tax savings for the wealthy.

David Robbins, a director at WTW, a professional services firm, calculated that for someone with a £1.4million pot, the tax savings will be “less than a third of what [Labour] say”.

He added that Labor appeared to have “applied the wrong rate change to the wrong part of the pension pot” in its calculation.

Instead of the £150,000 tax saving, they would be in the region of £29,000 to £47,000, Robbins said.

Kay Ingram, a chartered financial planner, said Labor’s press release “appears to exaggerate the tax savings for individuals”.

“It is a pity that the opposition has chosen to attack this proposed change without finding an alternative way to eliminate unexpected tax bills and the disincentive to keep working that the current tax system has created,” she added.

Labour, which said on Thursday it would seek to keep doctors in work by creating a targeted scheme to deal with their pension woes, declined to comment on the apparent error in its press release.

But it tacitly accepted a mistake, saying on Friday it was now using a different example from the Resolution Foundation, a think tank, and suggesting that someone with a £2million pension pot would secure nearly £250,000 in tax savings.

The apparent error in Labor’s press release follows days of confusion over the nuances of complicated pension tax rules and how people could be affected by Government and Labor proposals.

Chris Etherington, a partner at RSM, an accounting firm, said Labor’s calculation of a purported £150,000 in tax savings looked like it was “based on a muddled understanding of how the pension tax rules worked”.

He added it’s hard to see how the Resolution Foundation calculated its numbers.

As well as scrapping the lifetime allowance, Hunt proposed raising the annual limit on tax-free pension contributions 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 financial regulator, has estimated the proposals could result in 15,000 people returning to work.

But Nimesh Shah, chief executive of Blick Rothenberg, another accounting firm, said Labor’s knee-jerk reaction to Hunt’s budget announcement was “unhelpful” as it would significantly influence taxpayer behavior ahead of the next election.

“It could even mean that people in this window are contributing significantly too much to their pensions to secure the benefit now, as Labor would have to introduce another form of firm protection if they pull this off,” he added.