Scrap pensions tax relief – think tank
The government contribution would be up to an annual allowance and would be paid irrespective of savers’ taxpaying status, according to Johnson’s report Incentivising retirement saving: the end of tax relief, and a new beginning, which was published on Monday.
The report argues the 25 per cent tax-free lump sum should be scrapped – with accrued rights protected – and also calls for an end to the lifetime allowance (LTA), which it argues “adds considerably complexity to the pensions landscape”.
Another of Johnson’s proposals is that ISA and pension products should share an annual combined contribution limit of £30,000, replacing the current ISA and pensions tax-advantaged allowances.
The CPS report comes days after pensions minister Steve Webb called for an overhaul of tax relief on pension contributions with a flat 30 per cent rate introduced and the LTA axed.
The CPS report claims Johnson’s radical proposals are in keeping with the spirit of last month’s Budget, at which Chancellor George Osborne announced a package of measures that give retirees unprecedented access to their savings.
But commentators have suggested the CPS report is “overly intricate”.
“We don’t think this is a good moment to start attacking the tax free lump sum entitlement,” said Hargreaves Lansdown head of pensions research Tom McPhail.
“By contrast, the pensions minister’s recent musings around the idea of a flat rate of 30 per cent relief, combined with the scrapping of the lifetime allowance, look simpler and more attractive.
“The LTA is a policy which is reaching breaking point, both in terms of the increasingly complex protections being introduced every time the LTA decreases and in terms of its negative effect of acting as a disincentive to save and to invest well.”
Johnson’s eight specific proposals:
1. Pension contributions from employers should be treated as part of employees’ gross income, and taxed as such.
2. Tax relief on pension contributions should be replaced by a Treasury contribution of 50p per £1 saved, up to an annual allowance, paid irrespective of the saver’s taxpaying status.
3. ISA and pension products should share an annual combined contribution limit of £30,000, available for saving within ISA or pension products (or any combination thereof). This would replace the current ISA and pensions tax-advantaged allowances.
4. The 25% tax-free lump sum should be scrapped, with accrued rights to it protected.
5. The Lifetime Allowance should be scrapped. It adds considerably complexity to the pensions landscape, and with a £30,000 combined contributions limit for pensions and ISAs, it would become less relevant over time.
6. The 10p tax rebate on pension assets’ dividend income should be reinstated.
7. People should be able to bequeath unused pension pot assets to third parties free of Inheritance Tax (perhaps limited to £100,000), provided that the assets remained within a pensions framework.
8. The annual allowance should be set at £8,000, with prior years’ unutilised allowances being permitted to be rolled up, perhaps over as much as ten years, all subject to modelling confirmation.