The Chancellor’s plans to raise the lifetime allowance on pensions will not be “massively effective” in tempting over-50s back to work, the director of the Institute for Fiscal Studies (IFS) has said.

In an interview with i, Paul Johnson said that the tax-free limit on pensions savings was a “pretty small part of the picture” when it came to people retiring early.

Chancellor Jeremy Hunt is expected to announce in his Budget on Wednesday that the lifetime allowance – the maximum amount that can be saved in a pension before it is taxed – will be raised from £1.07m to around £1.8m.

There are also reports that Mr Hunt is considering increasing the annual tax-free limit on pension contributions from £40,000 to £60,000.

The move is aimed at tempting more over-50s who have retired back into the workforce, but Mr Johnson said he “can’t imagine [these changes] will be massively effective at reversing the trend”.

“To the extent that it’s about people voluntarily retiring, because they can retire early, it’s hard to know how to undo that,” he told i.

“It has been suggested that the lifetime allowance will be increased, but I don’t think there’s any evidence that this is a big issue other than for a small number of highly-paid doctors and a few other people in the public sector.”

He said the challenge was understanding why many over-50s were choosing to retire early, and whether this trend will continue.

“One question is whether it is this particular generation of people who were affected by Covid who are leaving – and whether the next generation will return to the pre-Covid trend [of retiring at the usual age],” Mr Johnson continued.

“The second question is: for those who have just left the workforce, is there a way of getting them back? At the moment, we are completely in the dark on this issue.”

Mr Johnson also told ihe would like to see changes to the “ridiculous rules which taper off those annual allowances”, which he argued would be more effective at preventing early retirement than adjusting the lifetime allowance.

Under current pension rules, for every £2 that an individuals income goes over £240,000 their annual pensions allowance decreases by £1 to a lower limit of £4,000.

Mr Hunt is expected to use his Budget on Wednesday to address the drop in the UK’s labour force participation with measures to encourage over-50s, benefits claimants and people with disabilities back into work.

The Treasury is reportedly looking at reforming the welfare system to allow claimants to continue claiming sickness benefits once they return to employment, while also scrapping the system used to assess eligibility for sickness benefits.

Mr Hunt has also announced changes to childcare support for benefits claimants, with payments for childcare paid in advance rather than arrears to help parents with costs. He also suggested the Treasury is considering raising the maximum Universal Credit childcare allowance.

The Chancellor is also set to lay out plans to expand skills training for over-50s to help them retrain in new industries.

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