Rachel Reeves gives pensioners a massive incentive to BLOW all their savings – is she mad?
The Chancellor has done a daft thing. It’ll create tax havoc for pensioners.
Rachel Reeves is sending savers and pensioners the wrong message (Image: Getty)
Rachel Reeves has just tried to solve a looming tax threat facing millions of pensioners with a quick fix that will only make things worse. Somebody in the Treasury should have warned her. Maybe they did. Either way, it risks causing an almighty mess, and make saving for retirement a nonsense.
First, the problem. Due to the frozen personal allowance, a policy introduced by the Tories and extended by Reeves, pensioners face an unprecedented situation. From April 2027, the new state pension will exceed the £12,570 personal allowance, at which point it becomes taxable. That’s daft, because it will see the DWP pay state pension and HMRC quickly take some of it back.
This will suck hundreds of thousands more pensioners into the tax system, piling pressure on HMRC.
Many will only owe a few pounds so the cost of collecting that tax will often be more than the money raised. Reeves calls this a “simple workaround”. But it looks more complex by the day.
Reeves says any pensioner whose entire income comes from either the new or basic state pension won’t have to pay income tax if they exceed the personal allowance.
The basic state pension is well below the personal allowance, but around 2.5million recipients pay tax on their state provision because they get it topped up by additional state pension such as S2P and Serps. This will also be spared a bill in future, provided they don’t have any other income.
These exemptions will last for the rest of this Parliament. It seems simple and fair, until you activate your brain.
First, there’s an issue with fairness. Is it right that someone who’s built up a tiny savings pot may be taxed on their state pension, while someone who hasn’t saved a penny doesn’t?
This throws up an even bigger problem, which threatens to undermine our whole system of encouraging people to save for retirement. Because, frankly, why bother?
Imagine you’ve scrimped and saved through life, and ended up with a few thousand pounds in a savings account. As a result, you won’t just pay income tax on the savings interest, you’ll also pay tax on your state pension when you otherwise wouldn’t have. Some will find that deeply annoying, and feel punished for doing the right thing.
The next thing they’ll think is this. Why don’t I just spend my savings? Suddenly there’s no income tax bill, no hassle, no HMRC. But also… no nest egg, no rainy day money, no security.
Reeves has given pensioners two huge incentives to do the wrong thing. First, not to save in the first place. Second to blow what they’ve built up.
For years, successive governments tried to make people more self-reliant. Now Reeves is doing the opposite. She’s storing up massive problems for later.
We saw in her benefits splurge that Labour is hellbent on discouraging self-reliance and encouraging people to live off the state. This is just another part of that process.
This threatens to create chaos, just like everything else this disastrous Chancellor has done. Is she mad, careless or does she simply not care anymore?
