Chancellor George Osborne should use the upcoming Autumn Statement to introduce sweeping reforms to the pension tax relief regime, the Centre for Policy Studies has urged.
The think tank has called on Osborne to make a series of dramatic changes, including combining the contribution limits for ISAs and tax-relieved pensions, and capping it at between £30,000 and £40,000. Osborne is due to deliver the Autumn Statement on 5 December.
In a paper written by independent pensions expert Michael Johnson, the think tank also called on the government to replace the 25% tax-free lump with a 5% top up of pension pot assets, paid prior to annuitisation.
Johnson argued the abolition of higher-rate pensions tax relief would pay for the ISA subscription cap to be raised from the current £11,280 to £30,000 or £40,000. He said the move would put pressure on pension providers.
‘The pensions industry would then need to refocus on delivering high quality asset management of (long-term) savings, the word “pension” having been consigned to history,’ he said.
Tom McPhail, Hargreaves Lansdown head of pensions research, said he was in favour of linking ISAs and pensions but not of increasing the ISA allowance if it negatively impacted pensions.
‘Increasing the amount that can be put in an ISA makes it easier to put money away, but not for retirement purposes, and there would be a risk the money would not be there when people needed it,’ he said.
Johnson (pictured above) supported his call to scrap the lump sum with research from provider Prudential which showed 10% of those who had taken the lump sum regretted doing so.
‘People are increasingly questioning the wisdom of having taken the lump sum and spending it, perhaps frivolously, not appreciating at the time the corrosive impact that this would have on their retirement income,’ he said.
Tony Wickenden, joint managing director of tax consultancy Technical Connection, backed Johnson’s plan and said the lump sum was an ‘anomaly’.
‘I could see them [the government] saying this should only be limited to those with bigger funds,’ he said.
‘It is an anomaly, unlike an ISA there is no quid pro quo so taxing it in some way is justifiable…I can’t see how people could get really upset about it being limited except that it has been around for a while.’
Other proposals included: a 30% flat rate of tax relief regardless of income tax band, a ban on salary sacrifice schemes, a 5% ‘reward’ from the Treasury towards employees in workplace schemes and a ‘safe harbour’ for employers giving pensions advice.