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Thinktank: Abolish higher rate tax-relief on pension lump sums

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.


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Public Sector pensions liability now exceeds £ 1 TRILLION and all this think tank can come up with is “lets knock private pensions again”

    Then again private pension plan holders don’t threaten to bring the country to a standstill everytime the Govt changes private pension rules and benefits or taxes their funds to the tune of £5 BILLION a year!

  2. Nick White, Pensions Law Limited 2nd November 2011 at 5:25 pm

    I think even a revenue-starved Treasury might baulk at any retrospective elimination of TFC. By the time you’ve refined this proposal to avoid retrospection, and prevented avoidance through phased drawdown, etc etc, the whole thing just becomes too complex.

    Being mischievous, I would point out that the Treasury has just enacted an incredibly regressive change by allowing those rich to enough to use flexible drawdown to effectively avoid the 55% tax rate on lump sums on death in drawdown: perhaps they could do something about that instead ?!

  3. The removal of the tax free lump sum on any level above the 40% tax rate would be mad.

    It would be easy for an individual to have never been a higher rate tax payer throughout their life and to then find they have to pay higher rate tax on the pension lump sum.

    Take a pension pot of £200k not that large and not the size of fund which would keep a rich person in the lifestyle they were used to. this would give a lump sum payment of £50,000 i.e. above higher rate tax rate.

    based on a 65 yr old male with a 63 yr old spouse a level annuity would be in the region of £8,300 at bset assuming standard terms.

    Why should he have to pay tax on the pension he may have spent 40+ years contributing to.

  4. Another day, another bonkers pension tax relief “proposal”. Sigh.

  5. the center forum think tank should get real and live in the real world! The example given on page 4 of their report gives a person A at 25 years old on a salary of £300,000 a year and paying £50,000 a year into his pension fund!The only people who are likely to be on this sort of money ar either working in the financial industry or a footballer.They are certainly not one or the many millions of hard working people who have worked all of their lives and contributed to providing for themselves when they retire and have never been a finantial drain on the state and are neither likely to be.
    So get real Mr Mark Lloyd and Mr Chris Nicholson (REPORT AUTHORS) and consider real people! LEAVE THE TAX FREE LUMP SUM ALONE!!!!!!

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