The tax-free pension lump sum, pensions tax relief and inheritance tax breaks should all be reined in to help pay for public services, a leading think tank has proposed.
The government could save itself £7 billion a year by scrapping a handful of wealth taxes and subsidies, research from the Resolution Foundation suggests.
The think tank is urging the government to tackle the thorny issue of pension tax relief.
It has previously called for a ‘flatter system’ that would help solve wealth inequality, arguing for pension tax relief to be set at 18% for basic-rate taxpayers and 28% for higher-rate payers, as is the case for capital gains.
In this report, though, it argues there should be a clampdown on the tax-free lump sum, arguing it should be capped at £40,000.
It points out that the current ability to take over £250,000 tax free (before hitting the Lifetime Allowance) is worth up to £119,000 to an additional rate taxpayer, £105,000 to a higher rate payer, £53,000 to a basic rate payer.
But for lower income pensioners who earn less than the personal allowance it is worth nothing.
The think tank says: “That’s very generous, very regressive, and a strange incentive not to stagger your retirement income. Capping the tax-free lump sum at £40,000 would raise £2 billion a year while leaving three quarters of future pensioners unaffected.”
In addition, the think tank calls for council tax and inheritance tax both to be reformed, while also urging the government to limit entrepreneurs’ relief.
In the report the think tank calls for the pensions inheritance tax loophole to be closed. Currently, pension pots can be passed on with no inheritance tax implications.
While it says this does not cost the Treasury much in the way of lost tax receipts at the moment, the think tank believes it creates a 'perverse' incentive for retirees to use other assets ahead of their pension pots for retirement income.
Home-buying Isas are just "expensive wealth subsidies"
The think tank added that two of the newest Isas launched over the past couple of years, the Lifetime Isa and Help to Buy Isa, should both be scrapped.
The Resolution Foundation labelled both the Lifetime Isa and Help to Buy Isa “expensive wealth subsidies, describing them as an “active subsidy for those already lucky enough to have wealth”.
Together the two Isas, which are primarily aimed at young people as a means to help them get a first foot on the property ladder or to save towards retirement, is projected to cost the government around £1 billion a year by 2022/23.
In the case of the Lifetime Isa, take up since launch in April 2017 has been largely underwhelming, with only a dozen or so providers offering the Isa in either cash or stocks and shares form.
Moreover, some critics have slammed the Isa as simply offering high-earners another tax break, a view The Resolution Foundation agrees with.
The Help to Buy Isa, on the other hand, was launched earlier, in December 2015, and will stop being available to new investors in December this year. It is designed specifically for first-time buyers looking to build up a deposit for a house, but via a cash Isa rather than a stocks and shares Isa.
It adds: “A government serious about saving money to address the welfare state challenges of the coming decades in a fair way would certainly look at the Lifetime Isa and Help to Buy Isa.
“These allow young people with the means (including some Resolution Foundation staff) to get up to £1,000 of cash from the government each year, through a kind of reverse means-testing – the support only goes to those lucky enough to already have quite a bit to save.
“While the objectives of elements of these schemes (such as encouraging youth home ownership) can be desirable, the reality of their operation is absurdly generous and mistargeted. They should be scrapped.”
This article first appeared on our sister website Money Observer