The Government is being urged to cap the pension tax-free lump sum and consider making employer contributions subject to national insurance.
Currently people in the UK can accumulate up to £1.25m in pension savings free of tax and are able to take 25 per cent of their pot as cash. This means savers can take a tax-free lump sum of up to £312,500 from age 55.
A report published by the Institute for Fiscal Studies today says policymakers should restrict the tax-free lump sum people can take when they retire.
It also suggests the “extraordinarily generous” NICs treatment of employer pension contributions – they are currently exempt from national insurance – should be reviewed.
On the tax-free lump sum, the report says: “At the moment, the size of the lump sum that can be taken tax-free is limited only by the lifetime limit on the size of the pension pot: with a £1.25m lifetime allowance, this means that £312,500 can be taken tax-free.
“While there are good reasons that we might actively encourage people to save a certain amount for their retirement, it is less clear that people who already have, say, a £1m pension fund ought to be subsidised for saving yet more, at the expense of other taxpayers.
“There is therefore a powerful case for introducing a cash limit on the amount that can be taken as a tax-free lump sum, at a level considerably below £312,500.”
In addition, the IFS estimates the Government could raise over £10bn a year by making employer contributions subject to NICs.
“It is hard to justify the extraordinarily generous NICs treatment of employer pension contributions,” the report says.
“Making employer pension contributions subject to employer NICs could raise an estimated £10.8bn a year.
“On grounds of intergenerational ‘fairness’, it might be preferable to charge some NICs on pensions in payment, which would raise an estimated £350m for every percentage point of tax.”