The Chancellor is expected to announce an increase to the pension cap next week, in a bid to stop professionals retiring early.

Middle class workers are expected to be given a boost to their pension in Wednesday’s Budget with the £1million lifetime allowance on tax-free pension savings likely to see the first substantial hike in a decade, according to the Mail Online.

Whitehall sources revealed Jeremy Hunt will use the Budget to unveil the “significant” increases in pension allowances that are often blamed for driving doctors and other professionals out of the workforce.

It is thought the £40,000 cap on annual pension contributions will also be raised but it has not been revealed exactly how big the increases will be.

The so-called “pension trap” leaves professional workers facing tax charges if they work in later life.

It has been blamed for thousands of doctors quitting with the British Medical Association saying the six-year freeze to the allowance in 2020 would “push doctors out of the NHS”.

The allowance used to rise each year in line with inflation but has been frozen at £1,073,100 until 2025/26.

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Had it continued to rise by inflation, it would have reached around £1.25m in the tax year 2023/24.

Alice Guy, head of pensions and savings at interactive investor, said: “The lifetime allowance is becoming increasingly difficult to justify and is incompatible with the Government’s aim to support older workers.

“Many doctors are leaving the profession before retirement age, partly to avoid triggering a 55 per cent tax charge once their pension entitlement reaches a level of around £53,000 (the level defined benefit pensions can reach before breaching the allowance).”

The lifetime allowance has more than halved in real terms since its introduction in 2011 which means that a 55 per cent tax penalty, originally intended for the super-rich, is catching out doctors, senior teachers and civil servants and encouraging them to leave the workplace.

Clare Moffat, pensions and legal expert at Royal London, said: “If the lifetime allowance had increased even by the Government’s inflation target of two per cent during the freeze, then by April 2026 savers would have been able to build up a pension pot of £1,184,789 without a lifetime allowance tax charge applying.

“The lifetime allowance remaining frozen at £1,073,100 until April 2026, could result in a tax charge exceeding £60,000 on the same pension pot.”

However, experts say more needs to be done to bring older people back into the workforce, especially as there are restrictions such as the Money Purchase Annual Allowance (MPAA) in place.

This says that if you start to take money from a defined contribution pension pot, the amount that can be contributed to your defined contribution pensions while still getting tax relief might reduce.

If you trigger the MPAA, the £40,000 cap on annual contributions reduces to £4,000 a year.

Jason Hollands, managing director at wealth manager Evelyn Partners, said: “Whether or not the MPAA encourages older economically inactive cohorts back to work, we welcome a boost to the limit as it is an obscure tax trap that catches out a lot of otherwise financially astute savers.”

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