Pensions minister Steve Webb says cutting the pensions tax-free lump sum is a “complete no-go” area that would not save the Treasury a significant amount of money.
Speaking at a fringe event at the Liberal Democrat conference in Glasgow today, Webb said the lump sum was “nonsense” economically but could not be changed.
Retirees can take 25 per cent of their entire pension pot tax-free in one lump sum while the rest can be withdrawn at marginal tax rates from next April.
Ahead of its spring conference last year, a Lib Dem taxation policy consultation argued the tax-free lump sum allowance could be cut from 25 per cent.
Last October reports suggested the Treasury had floated the idea of cutting the tax-free lump sum alongside the introduction of a £100,000 lifetime cap on Isas.
Webb said: “[Ex-Chancellor] Nigel Lawson called it the ‘much-loved but anolomous’ tax-free lump sum and I guess that’s where I am. As an economist it’s a nonsense but as someone who wants to encourage the take-up of UK pensions I think it would be a complete no-go to touch the lump sum.
“To be honest, out of £37bn we spend on pensions tax relief, a tiny percentage goes on the lump sum. It’s all very well saying that some people put the money in a long time ago and they have had shedloads of tax relief so they can give some back. But it’s a classic case that someone has played the game and as soon as they are going to score the goal we move the goalposts.
“The gain is very limited fiscally while the political cost and the impact on the reputation of pension saving feels out of kilter.”