SMF calls for a cash matching plan to offer saving incentives

10 November 2011 | By Steve Tolley

Centre Forum’s proposal to remove higher rate tax-relief on pension lump sums does not go far enough because it fails to incentivise saving, according to the Social Market Foundation.

Under current rules, people over 55 qualify for a tax-free lump sum up to the value of £450,000, which is set to be cut to £375,000 next year.

In a paper published last week, Centre Forum says those earning over the 40 per cent income tax threshold should pay tax on the lump sum at the appropriate rate. It says this would increase income tax take from future pensions in payment by 5 per cent.

But speaking to Money Marketing, SMF senior researcher John Springford says: “Getting rid of higher-rate relief on the lump sum would have only a marginal effect. It stops people drawing down big lump sums before retirement but it does not encourage saving.”

Springford says the current approach should be replaced by a more positive incentivised saving scheme that would offer the same benefits to all savers.

He says: “Under our proposals, for every pound you put in, the state would put in a flat amount up to an annual limit. It would be less regressive because everyone gets the same. It would encourage saving and be easier to understand.”

Under the proposal, income tax would be paid prior to contribution to a pension and so would not be charged on money drawdown.

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