Cap the tax-free pension lump sum to help pay for public services, says think tank

Kyle Caldwell
4 January 2019

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


In reply to by anonymous_stub (not verified)

If Govt. really wants to save money, cancel all of Govt. DB pension schemes which the country, like most commercial companies, cannot afford. Capping the PCLS would just make another reason why people wouldn't invest in pensions for their comfortable retirement, This would then leas to many more being reliant on Govt, in retirement

In reply to by anonymous_stub (not verified)

That's right, let's hit the pensioners again. On the one hand the Government promotes and encourages everyone to save into a pension and forces you to join a workplace pension when you're young. Then, through years of total financial incompetance by successive governments be they Tory or Labour, they try and take it away from you - either by raiding the pension company funds (I'm talking Gordon Brown here the UK's worst chancellor in decades) or suggesting a cap on tax free sums. All those who have worked hard all their lives, payed their taxes, NHI and saved for their old age are targeted once again. It leaves you thinking what is the point of trying to support yourself in your retirement years if the all that happens is the government schemes to take away what you have built up. If you've got nothing you're given at least something. If you've saved and been responsible, they try and take it away from you.

In reply to by anonymous_stub (not verified)

Its the same old crap from a brainless think tank lets cap this that and the other,Why dont they come up with some good ideas one like how about all these big firms paying PROPER TAX or how about MPs not getting a pension until they retire or getting rid of at least 250 brain dead unelected £300+ a day SO CALLED LORDS who are worse than the EU.or better still lets get rid of the USELESS think tanks who do nothing for this country except pick on the working class.

In reply to by anonymous_stub (not verified)

Oh for the day when we see austerity replaced by GDP stimulation at a basic working level.

In reply to by anonymous_stub (not verified)

Seems like the new Workplace pensions and automatic enrolment “it’s the law” has really been put in place to fill the black holes and cover up government failures, Not to mention ‘coming soon’ quantitative squeezing. We will end up unwittingly paying for the junk bonds that were bought up by the Bank of England to enable quantitative easing. I think that you will find these bonds being sold on to pension schemes so that joe public will carry the can once again for the banksters.

In reply to by anonymous_stub (not verified)

Think tank needs to but out.

In reply to by anonymous_stub (not verified)

The tax-free cash pension allowance is not an "incentive not to stagger your retirement income" because you can take it out a bit at a time when you want as part of draw-down, as any one taking advice should be told. This is out of date thinking. Though Ii imagine pensioners will be taking it out very quickly if they think I'll lose some of it due to a forthcoming cap.

In reply to by anonymous_stub (not verified)

What about those who plan to use the tax free cash to pay off their interest-only mortgage?

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