Higher rate tax relief on pension lump sums should be abolished to increase tax revenue and make pension tax relief more progressive, according to the Centre Forum thinktank.
Under current rules individuals over the age of 55 qualify for a tax-free lump sum up to the value of £450,000. This is set to be cut to £375,000 next year.
The paper, A relief for some: how to stop lump sum tax favouring the wealthy, was published today and says those taking a lump sum above the 40 per cent income tax threshold should pay tax at the appropriate income tax rate.
It says: “Making this change would prevent those with the greatest means from gaining disproportionately via a taxpayer subsidy of their pension income. Also, we estimate the change would contribute an extra 5 per cent to annual income tax revenues from future pensions in payment.”
The report says the tax free lump sum was introduced to encourage pension savings but that the current system is expensive for the taxpayer and disproportionately benefits the wealthy.