The Institute for Fiscal Studies (IFS) is calling for the pension tax system to be fundamentally reformed for greater fairness.
It says the system provides overly generous tax breaks to those with the biggest pensions, those with high retirement incomes and those receiving high employer pension contributions – but does relatively little to support many people with low incomes in retirement.
It says that reducing limits on pension saving – the route taken by the government in recent years – has done nothing to support low earners, “adds significant complexity and leaves subsidies that are still too generous for some”.
In a package of reform proposals, A blueprint for a better tax treatment of pensions, the IFS suggests scrapping the 25% tax-free lump sum to provide a more equal subsidy to all private pensions and benefit those with a low retirement income. This lump sum provides a large tax subsidy to those with high incomes and pensions, but is of “no value at all” to those with the lowest retirement incomes, it says.
The think tank also states that upfront relief equivalent to the rates of employee NICs should be extended to all pension contributions, ahead of a gradual move to a system in which all private pension income is subject to employee NICs.