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Govt urged to cap pension tax-free lump sum

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.”


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Do they want to encourage people to save for their retirement or not?

    Always suspicious that once autoenrolment was brought in then we would see an attack as described in this article.

    Ni on employer contributions would be rubbing salt into the wounds for employers who are now having to pay pension contributions. I thought this govt wanted to encourage small business ?

    Let’s focus on giving people encouragement to save for retirement first. Remember this will help with other problems that longevity brings . Easy tiger would be my phrase for this discussion.

  2. Lets get AE out of the way before making any rash decisions. One of the biggest problems pensions have had over the last few years is the governments continuous moving of the goalposts. What we really need is a period of stability then an assessment of how things like AE are panning out. My suspicion is that post 2016 the opt out rate for AE is going to be a lot higher than it is now.

    The biggest problem with financial services is that someone (government or regulator) changes the rules then doesn’t wait to fully understand the true impact before changing them again in response to some perceived problem.

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