Pensions: ‘Tax-free cash should be abolished’ says Think Tank
UK Pension savers may no longer be able to take 25% of their pensions as tax free cash if proposals of a think tank are taken.
Instead of the popular tax break, the Centre for Policy Studies (CPS) proposed that every pension pot should be increased by 5pc before it was used to buy an annuity.
It also proposed that the annual limit for Isas be increased to between £30,000 and £40,000 by having a single tax-free allowance across pensions and Isas. The current Isa limit is £11,280, of which half can be saved in cash.
Higher-rate tax relief on pension savings should also be abolished, the CPS said.
The report quoted research by Prudential which found that 79pc of pensioners drawing a company or private pension in 2011 took a lump sum from their fund at retirement – and that 10pc regretted doing so. Only those with guaranteed incomes of at least £20,000 a year should be allowed to withdraw a lump sum from their pension fund, the report suggested.
It said encouraging the withdrawal of a tax-free lump sum was “a bizarre way of encouraging people to build up a pot of assets to subsequently provide a regular pension income”.
Michael Johnson, the report’s author, said the £360bn spent over the past decade on encouraging pension savings was “misguided and ineffectual”. He said pension tax incentives were “clearly flawed”, as they were “crude and misdirected, primarily towards the wealthy” and “lacked any emotional resonance”.
“Today’s tax-based incentives to save for retirement are hugely expensive and, worse, ineffectively deployed. Skewed towards the wealthy, they do far less than they should to minimise pensioner poverty. Furthermore, they do little to catalyse a savings culture among younger workers, thereby exacerbating the looming generational inequality.”
Tom McPhail, the head of pensions research at Hargreaves Lansdown, said: “This report has many interesting ideas, unfortunately it is very unlikely any of them would ever work in the real world.
The government may think it’s simpler to cap or even remove tax free cash at retirement rather than removing the higher rate tax relief to raise a windfall. But tinkering with a much loved aspect of pension saving would cause outrage at a particularly sensitive time when the country is already faced with public sector strikes over changes to pensions.
The Govt are certainly set to make changes to the pensions system over the coming months but I believe the priority must be to encourage people to save for their futures, not potentially destabilize the current system.
Nigel Green deVere Group
Blog written on 27th of November