.jpg%3Fv1?source=ftadviser)
In a report, A blueprint for a better tax treatment of pensions, published today (February 6), IFS researchers suggested ways to even out tax support for pension saving – reducing subsidies where they are overly generous and increasing them where saving incentives are weaker.
The IFS said the current system of pensions tax does relatively little to support many of those facing low income in retirement, who most need it.
It argued that reducing limits on pension saving – the route taken in recent years – is not a good solution.
As part of the reforms, it suggested removing the 25 per cent tax-free component to provide a more equal subsidy to all private pensions, benefiting those with a low retirement income.
At present, people can take a quarter of their pension free of income tax.
While popular, the IFS said this provides a large tax subsidy to those with high incomes and big pensions but is of no value at all to those with the lowest incomes in retirement: non-taxpayers.
At a minimum, it said the tax-free component should be capped so that it only applies to 25 per cent of the first £400,000, for example, of accumulated pension wealth.
“This would still leave about four-in-five of those approaching retirement unaffected,” it said.
“Going further, we propose providing the equivalent of a capped 25 per cent tax-free component for basic-rate taxpayers, but designed in a way that increases the after-tax value of everyone’s pension (up to the cap) by the same proportion – basic-rate, higher-rate and non-taxpayers alike.
“A 6¼ per cent taxable top-up on all pension withdrawals would achieve this. There would be a case for providing a bigger top-up on withdrawals made via an annuity (which provides a secure retirement income) and a smaller one for other withdrawals.”
Our proposals would boost the retirement incomes of low and middle earners and provide greater encouragement for them to save more in a pension. Isaac Delestre, IFS
But Jason Hollands, managing director at wealth manager Evelyn Partners, argued these proposals could undermine faith in private pension saving.
He said: “People need to be encouraged to make appropriate provision if they want to avoid facing a steep decline in the living standards they have been used to when retiring.
“Our current system is certainly far from perfect, but regular tinkering has a corrosive effect on the savings impetus, giving the impression that the system is in flux. This risks undermining confidence in private pension saving as people fear that the goal posts will just keep getting moved.”
