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IFS chief calls for axing of pension lump sums

Paul Johnson of the IFS puts the case for annuity top-up payments

Johnson: ‘We would really like a review of neutrality’
Johnson: ‘We would really like a review of neutrality’

The Government should consider scrapping the 25 per cent tax-free lump sum and replacing it with a pension fund top-up at the point of annuitisation, says the Institute for Fiscal Studies.

In an interview with Money Marketing, IFS director Paul Johnson says the current benefit of accessing 25 per cent of your pension tax-free from age 55 is a poorly targeted use of Government subsidy.

He suggests that if one of the main purposes of a pension is to provide a regular annual income, offering a Government boost to pension funds at the point of annuitisation may be a better policy.

Johnson says the top-up payment could be equivalent in value to the tax-free lump sum.

He says: “The issue with the lump sum is not that it is overly generous, rather that it seems poorly targeted on the policy need. Alternatives might include an equal value top-up to the pension fund or annuity payments.”

“Without some incentive, too many people will not save for retirement. In addition, the Government wants as few people as possible to fall back on means-tested benefits. But there is a question as to whether the tax-free lump sum is the best way of achieving that.”

Johnson took over as IFS director in December after his predecessor Robert Chote left to head up the Office of Budget Responsibility.

Earlier this month, the IFS launched its first major piece of work under Johnson, the Green Budget, which echoed the institute’s call for a “coherent” tax system in its Mirrlees Review.

Johnson says he welcomes the Office of Tax Simplification’s current scrutiny on tax reliefs, which is looking into the effectiveness of 74 reliefs, including ones involving VCTs, Pets and insurance bonds. But he says it does not go far enough to achieve the overall coherence the IFS is calling for.

He says: “We would really like a review of neutrality in the system and where there are non-neutralities, they should be tes- ted to see whether they are appropriate and well justified.”

Johnson describes two inheritance tax reliefs, the agricultural and business property reliefs, as “odd” and suggests they should be ended. Both are being considered for the chop by the OTS.

He says: “They are treated more generously here than in other countries and we see no reason why you would want to keep that kind of benefit.”

Johnson says the stamp duty on housing, differing treatments of employer and employee National Insurance contributions and the exemption of financial services from consumption tax all fail to meet the Mirrlees coherency test.

The IFS put forward a tax to stand in place of VAT on financial services in the Mirrlees Review, published in November.

Johnson says something along the lines of the International Monetary Fund’s proposed financial activities tax could be the way forward.

In April, the IMF proposed the introduction of Fat – a tax on the sum of the profits and remuneration paid by financial institutions.

Johnson says: “The sector is arguably under-taxed. You cannot impose VAT on financial services as you can other things but something like the FAT would go a fair way to sorting that difference out. “There are a range of ways of achieving something which has a similar impact to VAT, which involves taxing some measure of flows or profits. We need to get that measure precisely right to make it work.”


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. Scrapping the ability to take 25% of the pension fund as Tax Free cash misses a few key points.

    There are still individuals who have planned to use their TFC to repay their mortgages at retirement. Scrapping this would cause income hardship in retirement as the debt would need to continue to be serviced.

    Many people have planned to use the TFC to have a well deserved holiday, change the car or remodel their homes so that it is fit for retirement living.

    Perhaps the biggest ‘nail’ would be that following so much bad press re pension funding overall and tax charges on death, individuals would baulk at the idea of even funding pension contracts if they could not get access to TFC at retirement.

    Removing the TFC entitlement would start the potential death of private pension provision in the UK.

  2. Who’s this idiot??

    A tax free lump sum used to redeem , for example, a mortgage at 5% interest rate from age 55 is FAR FAR FAR FAR FAR better than the 3 % one would receive on a joint life annuity!

    Idiot! Let people use their tax free cash as they wish!!!

  3. 1 Why would anybody save in a pension if no tax free cash? No tax free cash = Biggest disincentive

    2 Some (admittedly older) pension schemes permit the client to take 100% as tax free cash; how does Johnson deal with that?

    3 Some occupational (eg civil service) schemes are sold as Tax Free Cash = 3 * Pension Figure (I accept that this has become blurred since 2006)

    4 If I was on the point of death at retirement, or perhaps in poor health, I would want (perhaps even NEED) the tax free cash to assist with prolonging my life or getting private medical treatment etc, as I sure as won’t be getting any free NHS help

    5 Point made earlier about redeeming mortgages is very valid

    6 What about one nice holiday in a lifetime, at retirement

    7 I might need to (offer to) pay a child’s university fees to encourage them to stay off the dole

    8 I might have debts other than a mortgage which would surely be best use of money

    9 It’s a heck of a lot easier to use a lump sum wisely today rather than try to accumulate a lump sum from higher annuity payments over 15 or 20 years (I might not survive that long)

    In short, the money is needed at retirement (if not before).

    I could go on, but the blood boileth over ….

  4. So someone saves for 40 years, plans their future based on the lump sum and some young man (looking at the photo) comes along and trashes the planning. Great job and another reason why savers don’t trust politicians, civil servants or the pensions industry!

    And what about those retiring in very poor health? Without the lump sum they won’t see value for all those years of saving.

    What is wrong with personal responsibility? If I want to take the lump sum and have a smaller pension, why shouldn’t I?

    The sad thing is the taxpayer (i.e. us) is paying for this idiot.

  5. If a case could be made for the PCLS to go, then it could only be applied to new contracts. Too many people have based long term financial plans on the availability of PCLS. I was always suspicious of the move to change its name from Tax free cash anyway.
    I’m getting increasingly irked by numpties like this grabbing headlines at our expense.

  6. Some of these people are just too clever for their own good. Cloud gazing or what.

    To anyone who has saved in a pension the possibility of taking some monies out as tax free cash is of huge benefit. If they have sufficient remaining income then it gives them monies to be spent as they wish in their twilight years, holiday cottage, caravan, cruises etc before they rollover and die.

    This lot want everyone working to the grave and then take everything in tax when they die.

    This guy wants to go out with a few advisors who deal in the real world and see how people are looking forward to finishing work.

    They seem to want to justify their jobs by constantly changing everything.

  7. Let’s hope some good comes of such a provocative statement being made public. I suspect the public reaction will be akin to that received by the government recently when they considered selling off forests!

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