Rachel Reeves is urged to stage a £2 billion raid on better-off savers’ pension pots in the Budget by slashing amount which can be withdrawn as a tax-free lump sum
Chancellor Rachel Reeves has been urged to stage a £2billion raid on better-off savers’ pension pots by slashing the amount that can be withdrawn as a tax-free lump sum.
The Institute for Fiscal Studies (IFS) said it was ‘hard to justify’ the current rule, which can effectively subsidise savings for those with up to around £1million.
It was among a number of recommendations by the economic think-tank on how Ms Reeves can raise money through pension reforms in next month’s Budget.
Speculation has been swirling that retirement savings could be among the areas targeted in the Budget after Labour warned that tough choices were needed to repair public finances.
Chancellor Rachel Reeves (pictured on Wednesday) has been urged to stage a £2billion raid on better-off savers’ pension pots
The Institute for Fiscal Studies (IFS) said it was ‘hard to justify’ the current rule, which can effectively subsidise savings for those with up to around £1million (file image)
Under current rules, savers can withdraw up to 25 per cent of their pension as a tax-free lump sum when they reach the age of 55, up to a maximum of £268,275. The scheme costs the exchequer £5.5billion a year.
But the IFS said while there was ‘some justification’ for a scheme that encourages some people to save more, the scheme as it stands is ‘poorly targeted’.
In a study published yesterday, it said that 70 per cent of the benefit currently goes to those who were in the top fifth of earners when contributing to their pensions.
It recommended reducing the upper limit on the tax-free lump sum from £268,275 to £100,000.
That would affect one in five retirees and ultimately raise around £2billion a year, ‘with losses concentrated among the relatively wealthy’, the IFS concluded.
But it conceded that such changes may have to be brought in gradually as ‘people could reasonably argue that they had saved on the understanding that they would be able to take 25 per cent of their pension tax-free’.
The think-tank report also calls for pensions to be subject to inheritance tax and levying national insurance on employer contributions to pensions.
But it warns against reducing income tax relief on pensions contributions for higher rate earners, describing such a move as ‘damaging, complex and inequitable’ – amid much speculation that Ms Reeves could adopt the policy.
It came as separate figures revealed that speculation about the content of the Budget was already having an impact on the housing market.
Property website Rightmove said there had been a surge in homes with four bedrooms or more being put up for sale over the past week, partly attributed to a possible hike in capital gains tax.
It said landlords and second-home owners could be hit by the increase ‘which may be leading some to cash out now’.
Separately, London-focused estate agency group Winkworth said it expected to see a reduction in the number of flats available for rent as ‘landlords exit the market and aren’t replaced’.
This was likely to be the case ‘particularly in the short term as some look to speed up their exit in anticipation of increases in capital gains tax’.
