In a new report, A blueprint for a better tax treatment of pensions, published today and funded by the abrdn Financial Fairness Trust, IFS researchers set out proposals to even out tax support for pension saving – reducing subsidies where they are overly generous and increasing them where saving incentives are weaker.
The reforms would boost the retirement incomes of the bottom 80% of earners and provide greater encouragement for them to save more in a pension, while getting rid of overly generous subsidies that benefit those on high incomes could enable the removal of the complexities created by tapering away annual savings allowances.
Tom Selby, head of retirement policy at AJBell comments on the IFS report – ‘A blueprint for a better tax treatment of pensions’:
“The pension tax reforms set out by the IFS are balanced and well thought through. While often think-tanks will jump to radical proposals such as scrapping higher-rate pension tax relief in favour of a flat rate, the IFS rightly acknowledges this would create significant challenges, particularly for defined benefit (DB) schemes.
“Some of the ideas put forward here, in particular capping pensions tax-free cash, would be deeply controversial and risk abacklash of biblical proportions from voters. Others, such as making the tax treatment of pensions on death less generous, are potentially more doable but still come with challenges.
“The key, as the IFS acknowledges, is building a framework that is simple, provides savers with stability and maintains sufficient incentives necessary to ensure people save enough for later life.
“This need for stability is one of the reasons the idea of establishing a new pension tax commission, with a focus on simplification and encouraging more people to save for retirement, has appeal. Such a commission could potentially build the political consensus necessary to push through sensible, long-term reforms that can stand the test of time.”