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Think-tank: Govt should ignore flat rate and abolish tax-free cash

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George Osborne should resist moving to a “misguided” flat rate of pension tax relief and instead cut or abolish tax-free cash, an influential think-tank says.

In recent weeks it has emerged the Treasury’s preferred option for a new system is the flat rate of relief championed by much of the industry.

But the Institute of Economic Affairs says a flat rate would be “incredibly complex” and detach pensions taxation from “any reasonable economic principles”.

It says the current system has a sound logic as those on high incomes receive more relief because they pay more tax over their lifetimes.

The think-tank adds HM Revenue & Customs would need to introduce new complicated rules to stop employees working around a flat rate.

It favours retaining both the annual and lifetime allowance but removing the 25 per cent tax-free lump.

It says: “The tax-free lump sum allows contributions to sidestep the tax system completely – in effect creating an EEE regime for that quarter of the pension pot. This then necessitates a huge volume of tax regulation to prevent perceived abuse.”

Lowering or abolishing the lump sum would “hugely reduce the ‘benefits’ that flow to the rich from tax relief”, the IEA says.

It also takes aim at pension Isa champion Centre for Policy Studies’ Michael Johnson and others’ assertions of the cost of tax relief. It says highlighting the gross cost of tax relief is “totally wrong”.

It says: “The reports of the costs of pension tax relief we often hear about are not judged against sensible counterfactuals and vastly overstate the cost relative to a neutral system of taxation.”

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. What these think tank bozos overlook completely is that removing the 25% TFC allowance would hugely disincentivise tens of millions of people from locking away money into a pension plan.

  2. Very true, JS. They obviously think no further than the end of their noses. This could be the first step towards a true flat tax system which would remove all the complications and obviate the need for avoidance.

  3. Oh for goodness sake leave Pensions alone for 5 minutes.

    The truth is the Government don’t want people to save for their future, they want them to spend it now to keep the housing market Ponzi and any remaining feelgood factor alive until 2020 when the next “5 Year Plan” begins. What a dreadful system to run a country by.

    Doing the opposite of what the Government wants is generally a fine choice as an individual, and it’s no exception here.

  4. TFCS has been around in various guises for many years and been one of the main attractions of savings towards retirement. It is used for almost any purpose, but the main ones have been: paying off debts and loans (pension mortgage plan anyone?), using it for property purchase (e.g. BTL or holiday home), paying for a holiday or investing it to provide additional income (maybe via an annuity). To take this away from retirees could have a significant impact upon the planning they have done in expectancy of the TFCS and spoil the start to their retirement!! Of course, the T-T silver spoon boys and girls don’t give a hoot about this, as long as they can show that HMRC would get more in taxes and that it would deter people from taking a lump sum and possible leaving themselves too little to live on……………

  5. Great just what we need. With a month to go before the Budget why not spook all pension savers over the age of 55 into rushing to take their tax-free lump sum before its “potentially” abolished. Form a queue now.

    Also what happens if in doing this people face an exit penalty, will someone (the adviser) be forced into paying compensation on this if in retrospect the FCA decree that this breaches some yet to be announced ruling on exit charges.

  6. Totally ignoring the utter iniquity for those who would not get it, compared to those that already have had it, along with no lifetime allowance, no restricted annual allowances etc.

    The basic problem is a governments who will not leave anything alone, who want to come up with new and inventive ways of keeping the Ponzi scheme going, because they are reliant on it to get re-elected.

    This is a direct result of the electorate, including many who read these boards and comment putting themselves first and forgetting about what is the right thing to do, or what is in the countries long term best interests.

    It’s all about postponing judgement day, i.e the day when the politicians cannot come up with any new way to postpone dealing with reality, i.e living within our means.

    Ironically many of us blame the politicians, yet we should blame ourselves, after all they are a product of our voting habits……

  7. Trevor Harrington 8th February 2016 at 11:43 am

    One of the most frightening social issues of today is that too many people are having to work well into pension age, which in turn is stopping the younger generations getting into remunerative employment, and thereby contributing to the tax revenue system. In effect, we are subsidising the young unemployable from the tax revenues of the older generations, who should have retired several years previously.

    Obviously this is backward thinking, and a statesman like government should really be addressing the issue with considerable urgency.

    Of course, this may well be the only way that the Government can hope to resolve the budget deficit, and then commence reducing the national debt.

    However, this problem is enormous in the social issue of having a generation of young adults who have nothing better to do than remain as a cost to the State whilst claiming benefits, the very benefits which should have been paid to the older generations in state pension, but it also creates all sorts of social and behavioural issues to the community from the young and disenfranchised, through to the older generations who subsist in near poverty because they have had their private and state pensions removed.

    If we are not going to store up another financial catastrophe for ourselves 40 years from now, we really do have to move back to a generous state pension where all 60 year olds have the possibility of retirement, and full employment for our young and valuable adults.

    Removing even more benefits from the private pension system, be that tax free cash or some other benefit, in order to shore up successive governments overspend is incredibly short sighted, and will simply compound the social and economic problems of the Country for the future, rather than resolving them.

    When Gordon Brown raided the private pension system, which was previously sacrosanct, with his insidious tax on pension funds in 1997, he really did open the flood gates to successive Governments who are now treating the private pension fund as a valuable source of revenue to fund their own pet projects of social intervention.

    Gordon Brown has a lot to answer for.

    • Agreed, however the suggestion in the article is perhaps the least bad suggestion coming out of many of the think tanks. Its still a bad suggestion though, they just need to stop tinkering for 5-10 years.

  8. Given that many retirees with modest pots have counted on this money to do things at retirement that are not only eminently sensible but essential for the transition to a life on more limited means this would be an unrecoverable blow (i’m talking about things like clearing the credit card and cutting it up, replacing the car for probably the last time, making home improvements and modifications). And as mentioned before could well be the death blow to pension savings in this country. Between the complex rules, and ever shrinking allowances joe public will have literally zero reason to put money into a locked – in pension over, say an ISA. Not to mention the RAFT of new legislation to differentiate between those who have accrued it already and newer contributions (no one would be stupid enough to retrospectively apply it because the political backlash would be so gigantic that party would be out of power for a generation)

  9. Anthony John Etkind 8th February 2016 at 1:52 pm

    Given that MPs and civil servants enjoy TFC from their pensions, the cynic in me considers it unlikely that abolition is on the agenda.

  10. I’m sure that if the Government did abolish tax-free cash they would find a way to keep it in place for Public Sector pensions.

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