Recent weeks have seen speculation that the new Chancellor will
make changes to pensions taxation to raise revenue in her
upcoming inaugural Budget. The current system of pensions tax
provides overly generous tax breaks to those with the biggest
pensions, those with high retirement incomes and those receiving
big employer pension contributions, and there is a strong case
for reform. However, the government should not be looking for
‘easy money' by simply reducing up-front income tax relief. That
would be damaging, complex and inequitable. Rather, it needs to
look at where there is genuine excess generosity – in the
treatment of employer contributions, of tax-free lump sums and of
the pension pots that are inherited. Change needs to be carefully
thought through and should be set out as a long-term strategy for
reform. The taxation of pensions needs to be carefully designed
and savers need certainty and stability.
David Sturrock, Senior Research Economist at the
Institute for Fiscal Studies, said:
‘Tax reliefs for private pensions are overly generous to those
with large pensions and are in need of reform. The case for
restricting up-front income tax relief is weak, however. If the
new Chancellor is looking to raise revenue from pensions
taxation, she could do this while improving the design of
the system. Reducing the cap on the amount that can be taken
tax-free from a pension and bringing pension pots into the scope
of inheritance tax would reduce the tax advantages enjoyed by
those drawing large pension incomes and those inheriting pension
pots. The complete exemption of employer pension contributions
from National Insurance contributions is also a large, opaque and
poorly targeted subsidy that should be curtailed. Any pensions
tax changes in the Budget should be part of a clear long-term
strategy that provides a predictable environment for savers.'
Mubin Haq, Chief Executive of the abrdn Financial
Fairness Trust, said:
‘Too many of our pension tax reliefs are overly generous to those
with the largest pension pots and the highest incomes. These
reliefs are ripe for reform and would fit with the PM's recent
pledge that those with the broadest shoulders should bear the
heavier burden. Changes to taxation are critical if we are to
avoid deep cuts to our public services.'
READ THE FULL BRIEFING
HERE.
ENDS
Notes to Editor
- ‘Raising revenue from reforms to pensions taxation'
is a comment by Stuart Adam, Isaac Delestre, Carl Emmerson, Helen
Miller, and David Sturrock for the Pensions Review.
The full comment can be read on the IFS website here:
https://ifs.org.uk/articles/raising-revenue-reforms-pensions-taxation
